NEW DELHI: Rahul Senapati a software firm employee in Gurgaon had invested in a well known tech firm’s stock two and half years ago. Since then, however, the value of his investment has been trending down.
Despite initial research, the share price began plummeting since the time he invested in it. Rahul’s dilemma is whether to hang on, whether the current situation and wait for his investment to turn better or sell now and cut his losses.
Rahul is not alone. While many daily stock traders, investors and experts say “Buy Low, Sell High. Timing is everything.” Even such simple advise is hard to get right.
“Many people continue to hold on to a stock despite a heavy beating, feeling it will eventually will bounce back. Gut feeling, developed over time may take data and convert it to conviction on buying, holding or selling a stock. However, use your understanding and common sense with analysis of the data and facts,” says Anil Rego, chief executive officer and founder, Right Horizons.
Amit Sharma, senior analyst of Commtrade adds, “Every investment and investor is different. Don’t try to mimic what your neighbour is doing. He may have a totally different objective and risk profile.”
Some investors buy shares without sparing time to gather basic information about the company, most importantly the product or service that the company sells and the probable future for that business. “Retail investors get carried away by television channels, company management’s promising speeches, huge expansion plans and react on the current surge in the price of the stock,” Sharma points out.
However, if a stock is underperforming, what should investors do? Is averaging a solution? According to Rego, every decision to buy or average a stock should be taken as an independent decision. If the original decision to buy was wrong, then constantly throwing money at a mistake can be tragic.
Often excellent stocks may underperform for long. If the value proposition and value in the stock is intact, then averaging and continuing to hold for the long term can be very profitable.
However, if the stock is beaten due to market and industry environment and we don’t see further fire in price; it may be better to sell at a loss than holding on to it, Rego says.
According to an independent technical analyst, Ashutosh Bharadwaj, “Buying and selling decisions are considered on the basis of various analysis and indicators like Price-Earning (PE ratio), Price Earning-Growth (PEG) among others. Many analytical softwares are also available for making those judgements.”
While many investors do not sell at a loss, if the stock price keeps dropping, the losses will only increase. Not selling even as stocks keep rising is a result of greed, which is a human character, point out experts.
The secret is being disciplined while investing. A disciplined investor avoids sentiments, but uses numbers like sales, margins, profits and growth rates to decide at what price a stock should be purchased, and sold.
Whatever said and done, however, the profit or loss you see from your investments in the stock and capital markets depend on one thing — your ability to clinch the deal at the right moment.