What is Profit Booking in Stock Market: Rules & Best Strategy

The main motive for investing or trading in the stock market is to earn some money from this place. And it would be only possible when you book profit in your invested stock from time to time and make your investment or trade a profitable journey.

Profit Booking is the only strategy that can help everyone in the stock market to survive and keep trading otherwise people incurring losses, will exist from this place. Today, we will discuss every aspect of profit booking, from profit booking rules to indicators and best strategy for intraday and long-term investors everything you need to know.

What is Profit Booking in Share Market?

In the stock market world, when you invest your money in stocks, or buy shares of any company with the expectation that it will rise and you can sell at a higher point and book some profits. It is simply the act of selling the security to gain some profits by liquidating your investment in the stock market whether it’s in the cash market or derivatives segment.

Why Profit Booking is Important?

Booking the profits to earn money is the only motive in the stock market, but several other factors make profit booking important. Though, making your investment profitable is the main motive but let’s find out what are the other reasons why profit booking is important.

Liquidating the Investment: When the stock market is highly volatile or VIX India is high you should book profit to liquidate your investment and avoid losses. When the market is volatile, stock prices keep moving up and down, it is neither stable nor moves in one direction. Hence, you should book whatever profit you are getting from your trade. And if the stock comes down you can again enter the trade or buy the stock and book profit later.

Reshuffling Your Portfolio: If your portfolio has the stocks trading at a higher price than your investment cost, then you should book profits in such stocks. Rebalancing the portfolio is an important part of investing in the stock market. You can adjust your portfolio by liquidating some money and investing in bullions, fixed deposits and other assets. You can buy stock at lower prices and book profits at higher prices and keep reshuffling your portfolio.

To Control Your Emotions: While investing in stocks many people create an emotional attachment to the stock, and such emotional-based behavior does not allow us to sell the stock, even if it is trading at a higher price. At a higher price, we don’t want to sell that and we just want to keep hold of such stocks and want to keep looking that growing further. But this is not the right behavior while investing in the stock market. Here you should book not all, but partial profits and you can use that money to invest in other stocks, or assets like FDs, Gold and real estate etc.

How Much Profit Booking is Important?

Profit booking in the stock market is good behavior to keep earning some money and liquidate your investment for your next venture. But the question arise here, how much profit booking is important or how much profit you should book to keep investment profitable with further opportunity to earn more profits and minimize the notational losses?

Basically during the intraday trading investor book the profits in the whole investment and target the next stock for trading. While on the other hand, long-term investors wait for higher profits and do not book any profits during the first phase of the stock rally. Here, they should book some partial profits to take advantage of stock price movement.

As the stock market movement is a very unpredictable thing, you can’t guess or estimate how much profit you can earn from your investment in a specific time. Even intraday traders and F&O market players keep booking the profits partially book to make their investment profitable. Hence, you should also book partial profits from time to time.

What is Partial Profit Booking?

Partial profit booking is the process of selling some quantity of shares of your investment to earn partial profits and keep the remaining shares in your portfolio if the stock moves further. To make it understand better let’s take an example illustrated below.

Suppose you have bought 1000 shares of XYZ Company at Rs 100 each or you are already holding a share of this company at the same price in the same quantity. Now as per the traders’ expectations, the stock price moved from Rs 100 to Rs 150 in a week or you can say in a month or maybe in a year.

Here, you can sell 500 shares from your portfolio and book some profits which would be called the partial profit booking. Here, you can take out the cost of your 75% investment. The remaining 500 shares you can hold when the stock moves further or you buy again the same stock if it comes down again around the same levels were bought earlier.

How to Book Profit in Intraday Trading?

In long-term investment, you don’t have a deadline or time limit, whenever your stock is trading at a higher price you can book profits either partially or fully depending on your requirement of money. However, in F&O or intraday trading, you have to keep an eye on your stock and book the partial or full profits as soon as it gives you some amount of returns.

Profit Booking in Intraday Trading is possible with the help of technical analysis tools, and techniques like analyzing the candlestick chart patterns, and drawing the technical indicators on charts helps to know where you have to book partial profits or completely exit from the trade.

When to Book Profits in Trading?

Apart from technical indicators for intraday trading for long-term investors, there are certain situations where you should book profits. Apart from technical analysis, fundamental analysis is another factors you should consider to book the profits in trading.

Company-related News: It is called the microeconomic factor, when any company-specific news comes into the market it creates positive sentiments towards the stock of that company. In such cases, the stock price moves higher, here you should book some profits to take the advantage of company-specific news and enjoy some profit booking in the stock.

Sector-related News: Apart from company-specific news, industry or sector-related news also comes into the market, like favourable government policy towards a particular sector that also influences the stock price of all the companies in that sector. Here you should book some profits if any such sector-specific related news comes into the market.