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Friday, July 29, 2016

What should you do when a stock suddenly shoots up like a rocket?

Sometimes strange things happen in the stock market. Well, may be not so strange for experienced hands. But logic-defying for novice investors.

One of these logic-defying happenings is a stock that has been lying dormant for months suddenly taking off like a rocket. (Many mid-cap and small-cap stocks have become 'rocket' stocks recently.)

Why does it happen? What should you do with such a stock?

There can be a number of reasons for the 'why'. The company may have low floating stock (i.e. the number of stocks readily available in the market for buying and selling).

Many mid-cap and small-cap companies have high promoter holdings that they do not transact in the market. What little is available to the public may get quickly gobbled up - leading to a supply-demand mismatch and higher prices.

Even where floating stock is comparatively higher, large informed buying by HNIs or FIIs can cause a sharp price spurt. Sometimes a company declares unexpectedly good results, or a business turnaround that lead to massive buying.

What should a small investor do with a 'rocket' stock? There are two possibilities:

1) You already hold the stock

a) book partial profits and hold the balance with a trailing stop-loss; or,
b) continue to hold the entire amount with a trailing stop-loss; or,
c) wait for the inevitable profit booking and then add to your holdings
d) if the stock is an unknown small-cap, just book your profits

2) You don't own the stock but want to jump on the bandwagon

a) wait for a profit-booking dip and then enter
b) if the stock price continues to rise, don't try to chase it; look for another stock
c) if the stock is an unknown small-cap, just avoid it.

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