Introduction to Commodities Investing
February 12, 2025
Investors are used to looking at projections of future events. They commonly use projections about future cash flows, future profits, and even future dividends in order to make investing decisions. However, a lot of the time, the projections that they use are overly optimistic. This leads them to make bad investing decisions. This problem of […]
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If you have regularly observed the stock market, you may have noticed that a lot of time when the market falls, experts attribute this fall to profit booking. The concept of profit booking is known to a lot of people. However, the knowledge is merely superficial. In this article, we will have a closer look at the concept of profit booking.
Profit booking, also known as profit taking is when individuals or companies liquidate their holdings to cash out the profits that they have created. It must be understood that for a situation to be called profit booking, there has to be a profit involved. If stocks are liquidated and cashed out to avoid losses, then such a situation cannot be called profit booking. There are a couple of more features of profit booking that are described in this article.
When stocks rise in value, the resultant wealth created is nominal wealth. This is because the price of stock is only a notion that can change at any point in time. Therefore the value is not stable and keeps on fluctuating. Any profits and losses calculations made using this value are merely notional.
On the other hand, when the investments are liquidates, investors have hard cash in their hands. The value of hard cash does not fluctuate. Therefore the wealth created is real. Therefore, in other words, the transfer of nominal wealth to real wealth can be called profit booking.
When profit booking is done, money flows out of the market. People liquidate their shares for cash. Therefore, there is an inflow of shares and an outflow of cash. This situation leads to the price of the stocks falling. As a result a slump is created in the market when a lot of people indulge in profit booking. However, the slumps created as a result of profit booking are extremely temporary in nature. These issues get resolved and the stock price comes back to normal in a matter of days since there is no problem with the fundamentals of the stock. Profit booking are just temporary aberrations created by market sentiments.
The following situation leads to investors cashing out their investments en masse.
Investors have to adjust their portfolio after the profit booking takes place. There are multiple ways to accomplish this. Let’s look at some of the most common ways.
Profit booking is therefore a certain phenomenon. People will always want to liquidate their investments when their targets are met. As an investor, one needs to understand how to navigate these events. Sometimes it might be advisable to sell off one’s holdings whereas at other times it may simply be advisable to hold on.
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