You may have noticed that a lot of time when the market falls, experts aspect this fall to profit booking. If you have regularly observed the stock market. A lot of people know the concept of profit booking. Still, the knowledge is merely superficial. Here, you will get to learn about some common profit booking strategies. Generally, traders have to adjust their portfolio after the profit booking takes place. Here are various ways to accomplish this, so let us have a glance at some of the most common ways.
Restoring the Original Allocation:
This is commonly practiced strategy by experts. Analysts book profit by restoring the original allocation decided by the investor. Now let us assume an investor had a portfolio that was 60% equity and 40% debt. In this portfolio the growth caused the percentages to change. As the equity grew much faster than debt, so the percentage changed to 75% and 25%. Hence, when equity is sold off, the trader can use the proceeds in such a way that the original 60%-40% balance is restored. It allows you to automatically spend less on buying overvalued assets. And more on assets that may deliver in the future.
Above a Particular Percentage:
The other common profit booking strategy used by investors is target based investing. The investor decides a specific percentage of growth per annum for every investment. But if that growth target is exceeded, then the trader will sell off the asset and buy an asset that may be depressed or undervalued. Therefore, for example, suppose you have purchased a share for $100. You have a target of 18% per annum. In this condition, where the share breaches particular mark, you must simply sell the stock and buy an asset that is undervalued at that time. Many times, this target is not set by the individuals but a brokerage firm helps you by giving buying and selling recommendations.
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