When to hit the exit button for stocks

It pays to keep your ear close to the ground. More so when it’s a question of stocks and your investment in the same. In short, we call it staying clued in. Any delay in making a timely exit in the face of an adverse scenario hitting sentiment can deal a scathing blow to your money. That makes it imperative to be on guard not just on movements of a given stock but company fundamentals.

Stories abound. Take, for instance, the beleaguered Kingfisher Airlines, Deccan Chronicle and other such companies that have been in news. Whatever the trigger that brought things to such a pass, one thing is clear – There are lessons to be learnt for retail investors. So, if you happen to be a direct equity investor, here are some standard operating procedures you would do well to heed and if needed, wave the red flag.

Spot the warning
First of all, investors should have a fair knowledge about the buzz surrounding the Street before taking a call on whether to stay invested or not. If the talk has a negative shade and sounds less promising, there is nothing wrong in making an escape.

In the case of Kingfisher and the subsequent grounding of fleet, investors who ignored those early warning signs – the dwindling financials of the operator, strikes over unpaid salary and demand by lenders to pay up dues – burnt their fingers for staying invested.

However, in the case of media house Deccan Chronicle Holding, where the National Stock Exchange has decided to suspend trading equities, retail investors were in for a big predicament after they were trapped without an exit route in place. “An investor should fix in advance the absolute value of the loss he can bear in each small value turnaround stock that he enters.

Technical analysis may not work always. Hence, the retail investor should keep a loss limit and if it goes beyond the pre-fixed limit, exiting the stock would be a better option irrespective of the hype on turnaround hopes about the stock,” said Deepak Jasani, head, retail research, HDFC Securities.

Tracking fundamentals
Owning a stake is like entering a business. Grab all the information available about the firm in question by analysing and studying its balance sheet. Pankaj Mathpal, financial planner, Optima Money Managers, is on target: “One should devote time to understanding every minute detail about the company and closely watching balance sheet issues.”

Make sure the company is making operating profits through its business operations. And on top of it, with the available information, you should be in a position to roughly calculate if the company is likely to keep making profits or not in future. It also works for you if you manage to get a grasp of any upcoming mergers and acquisitions that may sway a stock. Keeping track of net cash flows can provide some invaluable clues, too.

An unusual spike in debt levels can also serve as a wake-up call for an investor. Also, one should have on its watch list return on capital employed and return on equity on a continuous basis.

Price and volume movements
It’s a big reason to worry if price and volumes of a particular share do not move in line with market growth. At times, some crucial leads may not be out in the public domain, which is why one should look up to the price and volume of trade for those clues. The bottomline is: You can give a miss to the the stock path and its historical trend, but only at your own peril.