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Strategy for loss making stock holding

Some tips for investors who are holding stocks that have eroded value in the recent corrections


After a dream bull run over the last four years, the domestic markets are in the grip of a slowdown from the last six months. There have been a couple of pull back rallies but every rally is followed by a correction and the markets are falling to new lows in each correction phase. There is a lot of negative news flowing in from all ends and as a result the markets hit their lowest levels in 2008 recently.


Currently, the market sentiments look quite bearish. Rallies in the markets are quite short lasting and most of them end in intraday or at the most in a couple of days. There are selling pressures at every level in the market. Many stocks have come down 40 to 60 percent from their peak levels. Stocks and sectors that led the market rally last year are the worst hit in this correction. For example, stocks in banking, financial services, power, energy and infrastructure have seen much deeper cuts than key indices.


Many investors are stuck with these stocks bought at higher levels. Investors are not sure whether they should sell at these levels or buy more to average out their purchase prices.


Here are some points that will help you decide between investing further and exiting after cutting losses:


Stay invested


Long-term investors who are holding blue chip or fundamentally-good large and mid-cap stocks, bought at higher levels, can remain invested. They can also invest more to average out the buying prices. Valuations of many blue chip stocks look quite attractive at this point. Many blue chip stocks are trading in single digit PE multiples and some of them are trading near their book value. The chances of significant decline from current levels are quite remote as most of the negative news has already been factored in current valuations.


Usually, these stocks outperform the index and recover their losses when the market direction reverses. Investors holding unknown stocks should look at exiting cautiously and cut down their losses.


Average out


Investors with high risk appetite can look at accumulating more stocks at lower price levels and hence average out their entry price in stocks. However, investors should only invest their risk capital in the markets. Investors should never take loans to buy shares in the markets. You should try to accumulate more stocks and average out your buying price systematically by buying in small quantities.


Take fresh positions


Many blue chip companies are trading at very attractive valuations in the market. The market is already flooded with a lot of negative news, and hence, there is a limited chance of a further downside from current levels, unless something drastic happens. This can be an opportunity for long-term investors to start picking fundamentally - strong stocks. Investors should avoid taking any positions in penny stocks and always look at investing in blue chip and quality mid-cap stocks only.


Switching from under-performers


Usually, in every market rally or correction there are some sectors that out-perform or under-perform the market. The same trend was seen in the recent correction as well. The stocks that performed quite well last year are under-performing the markets. Many stocks have come down more than 50 percent off their highs.


Investors with a large percentage of under-performing stocks in their portfolio should look at switching their funds to better quality and performing stocks. There has been some pullback in the market recently. Investors looking at cutting losses should carefully watch the price movements and cut their losses if they see a rally in their stocks.

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