Investing in stock markets requires you to be mindful of three things; knowing the right business to invest in, investing at the right time, and knowing the right time to exit a stock. While there are plenty of resources that talk about the former two aspects, exiting a stock can be a slippery rope. It’s true that to make long term gains from the stock market, stock investors must invest in the right business and allow their investments to reap results.0 However, there are certain signs that indicate that you should exit your stock and move on. Let’s find out what they are.
Change in the fundamentals of a company
Investors must consider making an exit when the fundamentals of the company are being compromised. To spot this, analyse the quarter-on-quarter performance of the company. For instance, if the company is delaying the reporting of growth numbers, if the utilisation capacity is decreasing and the number of non-performing assets is going up (for banks and NBFCs), then it means the fundamentals of the business are not strong anymore. Also, look at how much debt the business has accumulated as it is another important indicator. Most successful businesses that showed tremendous growth were debt-free or had negligible debt. Take a look at the debt-to-market ratio which is a way to measure the debt against a company’s ability to raise capital. Consequently, a small debt to market ratio denotes that a company is stable; if you see this ratio increasing then it’s time to plan an exit strategy.
Business is facing corporate governance issues
This is an extremely important indicator that retail investors must never ignore. A business is as strong as the people and practices behind it and good corporate governance indicates that the business is in good hands. Signs of good corporate governance is a business that treats external and internal stakeholders such as employees, workers, suppliers, customers, partners fairly and is out of any regulatory or legal disputes. The business should be conducted in a fair and ethical manner keeping and meet industry standards. To look for cracks in corporate governance, look at the company’s disclosure policy, conflict resolution guidelines among the various stakeholders, executive compensation, etc. All this information is available when a company is publicly listed. Also regularly watch news about the business you have invested in. If you see the business has run into legal or regulatory trouble and the dispute has been going on for a long time, or see a hasty exit of senior leaders without any clear explanation from the company then it’s time to reconsider holding on to your investments. When such incidents come to light, they hit the stock prices. Investors who have remained invested in such businesses for a long time tend to get emotionally attached and buy more shares hoping for a price resurge. However, such issues often dent investor sentiments and it’s difficult to reclaim the same amount of respect and trust from the investor community in such cases. A wise move would be to closely follow any developments in this regard and if you see the disputes are going on for a long time and see no resolution anytime soon, you can consider booking profits.
What to do after you sell the stock?
For investors who have stood by a business through thick and thin, it's natural to feel emotionally invested in its success. After all, they have done solid research before choosing a business and truly believed in its potential. Consequently, the psychological implications of relinquishing stocks of your favourite business could leave you constantly doubting your decision or second-guessing. You may regret that you didn't sell the stock at the peak price. However, thinking about it is only going to make things difficult for you. So be happy with the profits you booked. After a substantial time passes if you see the stock prices of the company have increased substantially, then assess the company again for its fundamentals according to its current standing and then take a call whether to invest again or not.
The bottom line is, you are in the stock market for long-term wealth creation prospects and although it is important to stay invested in a strong business if you have done your research, it is equally important to make a timely exit if you see the fundamentals are shaky. Remain prudent and rational while taking stock market decisions and do what is best for you.
Harsh Jain is COO and Co-Founder of