Partial profit booking is a great technique of booking profits on investments. It is a different from the conventional way of profit booking and is aimed to making more out of profitable trades.
It is well known that main idea behind investment is capital appreciation or monetary growth. The main objective is get rewards out of the investments in the form of profit. Wherever there is a chance of reward there is a possibility of risk.

However many investors tend to get so much carried away by greed of making more out of profits that they tend to forget the risk aspect part of investment. It is seen that in the pursuit of making more profits out of good trades they forget to capture the profits. Ultimately they end up losing money on these trades. As such risk management is an essential part of investment. 
To control risk means taking care of “Capital Preservation”. It is often recommended that  “Capital Preservation” should be given preference to “Capital Appreciation”.
For example on an investment the investor quickly earns a profit of 60%. However in his greed to make more profits he does not provide any risk management techniques in place. However, soon some news hits the stock and it price starts falling. The investor ultimately ends up making a loss. For this capital preservation is very important so that the investors can make use of the opportunities when he/she is making profits.
As stock markets are highly speculative in their behavior the need of capital preservation is even more in case of investments in stock markets than other ventures.
Partial profit booking is way of profit booking which is aimed at preservation of profits and ensure that profits are not lost due to sudden price damages in the stock. It aims to minimize risk and control the conservation of profits by booking it in a planned approach.
As we know stock markets are uncertain and volatile and anticipate their movement is very difficult. The idea behind partial profit booking is to book some part of the profits and thereby reduce the risk exposure of investments. If the outstanding investment see loses then it would be compensated by the profits which had been booked earlier. If the outstanding investment see upside then these profits would add up to the profits booked earlier.
An investor invests Rs.1, 00,000 in shares of a company X. Within a span of 3 months the investment sees a growth of 50% and the investments valuation turns Rs.1, 50,000. After 3 more months the markets crash and the shares of X see a huge fall of 40% and the valuations turn Rs.90, 000. If the investor had continued to hold the shares during the entire time span he would end up in making a loss of Rs.10, 000.
The trick of Partial Profit Booking
A safe strategy here would be book partial profits.
Let us divide the investment sum of Rs.1, 00,000 into 2 parts of Rs.50,0000 each and let us call these Investment Pt 1 and Investment Pt 2.
In this table I have shown the fate of the two parts of the investment which went through profit booking in two phrases. They are shown as Investment Pt 1 and Investment Pt 2
Time Frame Investment Pt 1 Valuation of Pt 1 Investment Pt 2 Valuation of Pt 2
3 months 50000 75000 50000 75000
6 months 75000 45000
Booked 75000 Booked 45000
As such it is seen that if the investor booked 50% profit after 3 months and held the rest till now he would be in profits. The valuation at the end of 6 months would stand at Rs.75, 000 (from the Investment Pt 1  which was booked after 3 months) + Rs. 45,000(from the Investment Pt 2  which was booked after 6 months) = Rs.1, 20,000.
We are not discussing how the approach of profit booking would have played out if the Investment Pt 2 also ended up in making profit. It is evident that in such a scenario the profit would only add up.
A trick for long term investors
Many investors use the technique of partial profit booking to recover the capital of the investment. This is a useful trick which can make investments attain a high level of safety.
Let us say an investor invests Rs.1, 00,000 in shares of a company X. Within a span of 6 months the investment sees a profit of 100% and the investments valuation turns Rs.2, 00,000. In such a case the investor can sell 50% of his investment and recover the entire capital he had spent in the investment. The remaining part of the investment would continue to give him returns.

No comments:

Post a Comment