When is the right time to sell shares?

I met Balachandran, an old friend, after many years and during the conversation that ensued he broached a concern that was very close to his heart. He had over the years invested a large chunk of his savings in shares. He was wondering, with the soaring of prices presently, whether it would be a good time to sell his shares. His concern was whether prices would fall. He wanted to encash his gains.

Selling is infinitely more difficult than buying. If the share price falls you do not normally want to sell and suffer a loss. On the other hand, if prices rise you do not want to sell because you feel prices may go up further.

One may ask – why sell? Why not hold on forever? This, however, is not always wise. So what then are the reasons for selling?

If the price of a share is not rising even at times such as this then it is probably deadwood, and should be got rid of. However, prior to doing so investigate a little on the company to ascertain the reason. Mathew had purchased a share at a premium of Rs 40 at its maiden issue four years ago. The shares are presently quoting at Rs 7 – a discount of Rs 3 on its face value. Mathew has been holding onto them in the vain hope that it would rise, or rather he does not wish to book a loss. His investment is in total 200 shares that he bought at Rs 50 per share – Rs 10,000. If he sells these now he'd book a loss of Rs 8,600. This company has floundered. It is better to book a loss and exit and use the Rs 600 that would be received in some other manner than clutch onto worthless paper. It is possible the shares would be delisted and Mathew would end up with a total loss otherwise.

Selling shares when the price has boomed gives you an opportunity to take advantage of the upswing. This should be done selectively as a booked profit is real whereas paper profits can vanish when prices fall. I recollect several years ago I had shares in the ill-fated Satyam. I had bought about 1,000 shares at a price of Rs 11 a share. When it did rise to Rs 400 I sold half my holdings. I had made a handsome profit. Later when the price crashed, though unhappy I was not desolate as I had booked my gains. I believe it is always important to sell a part of your holdings in a company once a significant profit has been made. By doing this regularly you'd ensure that the holdings that you have are effectively free. Let us assume you purchased 300 shares at Rs 100 a share. If the price rises to Rs 175 after two years, you should sell 175 shares. By doing this you'd recover your original investment and still have 125 shares which would be valued at Rs 37,500 although your cost is nil.

It is always advisable to sell if the company or that particular industry is not doing well – it is not a growth share.

You should go through your portfolio regularly and see how the shares have performed and whether they have done as well as you anticipated. Those which have not and are unlikely to grow should be sold and new shares purchased. This is known as "weeding".

Ideally at the time of purchasing a share you should decide at what price you'd be willing to sell it. This may be difficult especially when the price is rising. However, you should remember not to be greedy. You had arrived at the target price with a clear objective analysis. Respect that.

I would caution one to not sell in a panic. Just because there is an adverse rumour you should not offload. Analyse and understand its basis. The company, if strong, will rise. Recently, the shares of tobacco giant ITC fell because of a news item that it would not be permissible to sell loose cigarettes. So what? The company is strong. It is diversified and well managed.

It may be an idea to sell a share when its price has risen very sharply as it can fall also suddenly.

Remember. Do fall in love with a share. It is a commodity – a material possession. It has its uses and when its utility is over should be dispossessed without regrets.

The writer is an author and nanaging director, Cortlandt Rand