From time to time, I would be invited by Nextinsight, financial website http://www.nextinsight.biz/index.php/story-archive-mainmenu-60/912-2011/3327-just-ask-when-is-the-best-time-to-sell-shares to answer queries from their readers. Here is the latest answer by me to a reader asking about when it is the best to sell a modestly profitable stock.

Qn. If I have a modest profit for a stock, what should I do? Which option should I take to maximise my returns?

(a) Sell out all the lots
(b) Sell out only the profit lots and keep the initial capital lots
(c) Sell out only the initial capital lots and keep the profit lots
(d) Never sell. Only sell when the fundamentals i.e. economy, company facing some problems which warren buffet taught investors.

Before I attempt to reply this question, it would be good to take a step back to understand the basis for entering this trade or investment i.e. whether its short or long term, whether its event driven, technical basis or fundamental basis. Different basis should be dealt with differently.

For example, if our basis is that we want to punt on earnings expectation (i.e. event driven with a short term horizon à buy before a company releases results). We should have a pre-set take profit level written down even before entering the trade. If it hits our target price, then its good and we take profits. If it moves up by a bit (but below our take profit level) and stays there, we should consider liquidate everything since our basis is a short term trade before results release. As you are probably aware, 2 conditions in our basis for the trade have been fulfilled. One, results have been released. Two, short term time frame is approximately reached. If the price goes below our cost price and stay there, we would also have to cut loss due to the above conditions.

However, if we invest after going through an in depth analysis of the company and we have strong conviction and confidence in our abilities in understanding the company and believing that the market has not fairly valued the company yet, then we can continue to hold our investments till our target price is reached.

Last but not least, I will like to point out two things. Firstly, for options b and c, this is based on the premise that the initial capital OR the profit is big enough to sell separately after taking into account of commission costs etc. Also, the amount left should be significant enough to warrant our constant monitoring of the stock; keeping abreast of the company developments and comparing it to other attractive investment opportunities etc.

Secondly, for option d, “never sell until company fundamentals or / and economy changes”, I will like to add in the aspect of opportunity cost. If I am a shareholder of Stock A which is a great stock with excellent fundamentals, I may still switch to stock B which may be 5% weaker than Stock A on fundamentals but offers 300% more upside (exaggerate here to illustrate my point).