How to reinvest my gains in the equity?

Question

My equity portfolio has been gaining a bit of traction because the economy is recovering. I am a noob investor and It has only been a few months since I first started. The rule of thumb for most equity investors is to reinvest their profits so I am curious about how that can be done.

Say, I bought 100 units of stock at 100INR per share, and now it is worth 200INR per share. Does it make more sense if I:

• sell shares worth my percentage gain and reinvest in some other share?
• sell all units of the share and reinvest somewhere else?

Apologies for this amateur question, but I'm hoping the intelligent people of this forum give me some insights and material I can use to build my wealth.

Answer 1

First key thing here is that if you don't know the answer to this question you probably shouldn't be buying individual stocks: you're effectively driving a car without a licence or idea how it handles.

Because of the above, virtually all people in your position are better off putting money into broad indexes of stocks rather than individual ones, where they are much better protected from the mistakes people can make at an individual level.

Worth noting that even if you are buying indexes you should also have a reasonable idea of the time period you are investing over and have an emergency fund of liquid stable assets like cash: indexes of stocks are still highly risky assets over sub 5 year timescales and you need to be fully emotionally and physically prepared for -50%+ losses in the short run (note for many individual stocks this needs to be closer to -100%).

Once you get to this stage and if you are still interested in looking at individual companies the usual process is to spin off a small amount of your main account and to go after individual stocks. If you have an edge this small account will quickly outgrow your main index account, if you don't it will quickly underperform and shrink.

Answer 2

Here's one way to think about it: If you 20,000 INR in cash - would you buy 100 shares of this stock? Or something else?

If you'd buy the same stock, then you can either keep all of it, or sell half (if you can sell odd lots) and reinvest half in something else to diversify (reduce risk).

If you wouldn't buy it, then sell it and buy something else.

If you don't know if you should buy it or not, then I'd suggest selling it and buying something safer, like a broad index fund, until you're more confident in buying individual stocks.

Answer 3

The rule of thumb for most equity investors is to reinvest their profits so I am curious about how that can be done.

I think you've misheard. The rule of thumb I've heard is that you should reinvest dividends. If you have some stock, and that stock pays you some cash in the form of a dividend, then you should probably use that cash to buy more stock. That's called reinvesting.

On the other hand, if you simply own some stock and the value of that stock increases, then there's nothing to reinvest.

Answer 4

You are right that gains should be reinvested to make them part of the part of your equity which produces other gains.

But: if just the price of your shares has increased, it still is invested.

It is a different thing if you received dividends: in this case, you should ask yourself what to do with them.

1. You could keep them as cash in order to have a cushion for investing at a different point of time - in this case the dividend payment has helped you rebalancing.
2. Or you could reinvest them into the same or a different company.

But, as said: if your gain consists in mere share price increases, you either can keep them as they are, or you sell some of them in order to buy something different.

But selling them just in order to buy the same company again makes no sense.