Profit booking is an important part of trading. You have heard many times when a stock market is falling, experts attribute this fall to profit booking. The concept of profit booking is known to many people. However, knowledge is merely superficial. Today, we will learn, what exactly means profit booking and when we need to book profit.
What is profit booking?
When an individual or a company liquidates his assets to cash out the profits that they have created. When we talk about profit-booking, there has to be a profit involved. When the assets are sold in order to avoid losses, such cases are not considered as profit booking.
When the stocks rise in value, the resultant wealth created is a nominal wealth. This is because the price of a stock is only a notion that can change at any point in time. It means that the profit generated is not stable and keeps on changing with the price movement. Any profits and losses calculations made using this are merely notional.
On the other hand, when an individual sells his assets and book profit, he has hard cash in hand. This value of hard cash does not fluctuate. Therefore, the wealth created by profit booking is real. In other ways, the individual has converted the nominal cash to real cash.
Now, we will learn, when we should book profit in the stock market.
The following situations give hints to investors to book profit or exit from the current positions:
- Company-specific news: There are times when there is company-specific news. For example, some companies developed new technology. In such cases, a lot of people start looking to buy that stock. This demand increase will result in a rise in price. At this time, the investment targets of many people are met and they will start booking profit. This will cause a temporary slump in stock due to profit booking.
- Sector Specific news: Same as positive news in a specific company, there can be a piece of positive news for the sector as well. This will increase demands and so rise in price. Some people will start booking profit and cause a temporary slum.
- Economic data: Macroeconomic data also cause people to book profits. In some cases, if future projections are not positive, then it will create a situation to book profits.