More than two-thirds of midcap and smallcap stocks on the National Stock Exchange (NSE) are down 20% or more from their respective 52-week highs. The main reason for the decline in mid and smallcap stocks is their high valuation. Generally, there is a decline when the valuation is high.
The weak results of the September quarter and selling by foreign institutional investors (FIIs) are also a reason for this. Till now, due to the bullish market, investors might have made money from midcap and smallcap stocks, but now they need to pay attention to some fundamentals.
Which ones to hold and which ones to sell?
- At the time of correction in the market, it is difficult to decide which shares to hold and which ones to sell and book profit or exit them. Investors should understand the difference between a price correction (fall) due to changing market conditions and a fall in the stock due to business-related problems of the company. Selling good shares is not the right strategy in case of temporary decline due to national and international issues. When to sell, when to hold and when to buy depends to an extent on the investor's strategy and the condition of the stock.
- While deciding to buy, sell, hold or increase investment in any share, one should pay less attention to the market conditions and more to the fundamentals of the concerned company and the value of the share. It is possible that even if the market valuation is high, the valuation of a good stock may be worth buying. Or a stock has the potential to give good profits even if the market falls.
When to sell?
- On need of cash: If invested for short term. If the share is not in loss then you can sell it if needed.
- On completion of target: If the price target set for the share is achieved then it should be sold or profit should be booked.
- Stock Status: If the stock seems to have reached its maximum high, you can exit it.
- Unreasonable profits: If a stock gains more than 25% without any solid reason, then profit booking should be done.
- Company Status: If promoters are selling their shares in large numbers, the company is incurring continuous losses and the market conditions are not favourable, then it is better to sell.
When to buy?
- Good Valuation: A good share is being sold at less than its actual value (valuation). Or has fallen far below the 52 week high, then it is the right time to buy it.
- Financial Results: Every company listed in the stock market releases its financial results every 3 months. If the estimates are good then you can buy shares even before the quarterly results. Otherwise, you can buy shares if the quarterly or annual results are good.
- On arrival of IPO: If any reputed unlisted company is launching its IPO then research its market condition. Then after seeing its grey-market price, you can decide to buy it.
When to hold?
- Good Company: Whatever be the market condition, if you own shares of a company whose profitability looks good. Its promoters are reputed people and its long term prospects are good, so it should be held rather than sold.
- Long term growth expected: If the company shows good growth in earnings over a period of more than three years, then stay invested as valuations in such stocks can pick up quickly.
- Holding Period: Holding period is important to get the most out of the investment. The holding period of each stock may vary depending on the short term or long term strategy of the investor.
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