You took time and analysed numerous stocks to choose the best ones for investing. The stocks have the potential to help you achieve your investment goals. When you bought the shares, you entered a trade, making the share price your entry point. However, what’s the next step? When and at which price should the investments be exited?
The question requires a detailed understanding of an exit point and exit share price. You may buy penny stocks, stocks for intraday, or a company may announce a stock split; it is important that you know when to exit the trades to either book profits or reduce your losses.
What is an exit point?
An exit point is the price at which traders and investors choose to close their open positions in the stock market. For example, if an investor bought 100 common stocks of a company a year ago and wants to sell them at the current market price of Rs. 550, the price is called the exit share price. Most holdings are sold at an exit point apart from a short position (a trade where investors profit from falling stock prices). When an investor wants to short sell, the exit point becomes the buying point as the investor believes the share price will fall from the current price.
The main motive behind investors finding exit points for their holdings is to sell to book profits or to sell to cut losses. For example, if you have 100 company shares with a cost price of Rs. 300 but are witnessing a bear run (share price fall) in the stock market, reducing the share price to Rs. 220. Fearing that the share price may go lower than this, you sell all the shares at Rs. 220 to cut your losses. Here, Rs. 220 is your exit point, which may be an entry point for short sellers as they profit from a share price decrease.
Experienced investors who invest based on extensive research and effective strategies decide the exit point for all their investments at the time of investing. Their exit points may be based on a time period or a specific share price. For example, an investor may decide to sell the stocks after 6 months, irrespective of the share price, making it a time-based exit point. Another investor may decide to sell the shares when they reach a specific share price (lower or higher), making it a price-based exit point.
Setting exit points beforehand helps you to manage the maximum profit and loss margin for a trade. For example, if you have bought 100 shares at Rs. 500, you can set your exit point at Rs. 700 to make profits or at Rs. 450 to limit your losses.
Understanding the exit point
Exit points allow investors to know the maximum and minimum price limit for their investments per their set investment goals and strategies. If you want to make quick profits, you can invest a significant amount in volatile stocks. Here, it is important that you determine a low and high exit point to ensure you can book respectable profits or cut your losses in case the trade becomes negative.
Every investment must have an exit point as it defines the nature of investing. For example, if you are investing for retirement, the exit point will be time-based and will happen when you retire. If you are investing with the goal of purchasing a car, the exit point will be a specific share price at which your total investment value can help you buy a car.
Exit point orders
There are two types of exit point orders in the stock market: limit orders and stop loss orders.
Limit order
A limit order is when an investor sets the exit point at a profit target. As per its name, it limits the total profit an investor can make. If the investor feels that the share price will increase from the cost price, the investor sets the exit point above the current market price. Once the share price reaches the limit order price, the order is automatically placed, and the investor books the profits.
For example, if you have bought 100 shares at Rs. 400 and think it will reach Rs. 500 at some point, and you want to book profits at Rs. 500, you can place a limit order at Rs. 500. When the shares reach Rs. 500, the shares are automatically sold to assist you in booking profits.
Stop-loss order
The other exit point order type is a stop-loss order, limiting the total loss an investor can make. When investors feel that the shares may reduce in price from the cost price, they place a stop-loss order at a price lower than the cost price. It is to ensure that their investment does not result in heavy losses in case of a bearish scenario. Once the share price hits the stop-loss order price, the shares are automatically sold.
For example, if you have bought 100 shares at Rs. 400 and think it may reduce to Rs. 350 at some point and you want to mitigate your losses, you can place a limit order at Rs. 350. When the shares reach Rs. 350, the shares are automatically sold to help you cut your losses.
Conclusion
When to book profits or cut your losses is the most fundamental principle in successful investing. The exit point is the price at which investors either book profits or cut losses. It may be based on a specific time period or at a specific price, but it ensures that investors effectively manage their investments and portfolios.
