Profit taking is the process of extracting a return earned on an investment, often by selling off the investment after it has earned a desirable amount of money above and beyond the original purchase price. The investor may choose to sell all or a part of the investment in order to engage in profit taking. Profit taking strategies will vary depending on the nature of the investment, the amount of return that is earned, and the personal financial goals of the investor.
When evaluating an investment with an eye toward profit taking, investors normally take several factors into consideration. One has to do with the anticipated future performance of the stock. If the investor is sure that the value of the shares is reaching a peak, there is a good chance that he or she will make arrangements to sell the shares as close to the peak period as possible. This helps to maximize the amount of profit made from the venture, while also creating profit that can be funneled into other investments that show promise of beginning to appreciate in value.
The profit taking strategy may involve selling only a portion of the accumulated shares. There are two possible reasons for this type of transaction. First, the investor may require only a certain amount of revenue to finance a new income stream or investment. Rather than sell all shares of a given stock, a portion is retained in the portfolio, allowing the remaining share to continue generating a return.
A second possibility with stock profit taking of this type has to do with the projected impact of selling all the shares at one time. If the investor believes this move would create a market crisis that would cause other investments in the portfolio to begin depreciating in value, there is a good chance he or she will choose to sell only a portion of the total investment. This move helps to protect the remaining investments while still providing the investor with the cash needed to pursue other investment deals.
In general, investors develop a profit taking strategy based on their individual financial goals. With investors who tend to be conservative, the strategy of profit taking may be used rarely, owing to the fact that most of the investments in the portfolio have a low rate of volatility and are likely to produce small but consistent profit over the long term. More adventurous investors are likely to use profit taking more often, especially if the goal is to earn high returns from riskier investments. In this scenario, the goal is to earn the most return possible and sell off the investment for a profit before the shares reverse and begin to lose value.