DEFINITION of 'Profit Taking'

The act of selling a security in order to lock in gains after it has risen appreciably. Profit taking can affect an individual stock, a specific sector, or the broad market. If there is an unexpected decline in a stock or equity index that has been rising, and no specific reason for the drop can be identified, the decline is frequently attributed to profit taking.

BREAKING DOWN 'Profit Taking'

While profit taking can affect any security that has advanced – stocks, bonds, mutual funds, exchange-traded funds – the term is most commonly used in relation to stocks and equity indices.

Profit taking is often triggered by a specific catalyst, but it may sometimes occur simply because a security has risen sharply in a short period of time. A catalyst that frequently triggers profit taking in a stock is the quarterly earnings report, which is one reason why a stock may be more volatile around the time it reports earnings.

If a stock has gained significantly, traders and investors may take profits in it even before earnings are reported, so as to lock in gains rather than risk these profits dissipating if the earnings report disappoints. Profit taking may also be achieved after earnings are reported, like if the company has missed expectations on any front – EPS, revenue growth, margins, guidance etc.

Profit taking in a specific sector – even against the backdrop of a strong bull market – could be triggered by a development or event that is specific to that sector. For example, an unexpectedly weak earnings report by a bellwether company in a hot sector could trigger profit taking across the entire sector.

Profit taking in the broad market is usually caused by economic data – such as a weak U.S. payrolls number – or a macroeconomic (debt concerns, currency turmoil) or geopolitical (war, act of terrorism) event.

Note that profit taking is typically a short-term phenomenon, and the stock or equity index may resume its advance once profit taking has run its course. But a concerted bout of profit taking that knocks a stock or index down by several percentage points could signal a change in sentiment, and portend additional declines to come.

  1. Profit

    A financial benefit that is realized when the amount of revenue ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company ...
  3. Trade Trigger

    A trade trigger is any type of event that triggers a securities ...
  4. Corporate Profit

    Corporate profit is the money left over after a corporation pays ...
  5. Profitability Index Rule

    A regulation for evaluating whether to proceed with a project ...
  6. Profit Target

    A predetermined point at which an investor will exit a trade ...
Related Articles
  1. Investing

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on a company's net profit figures, seasoned investors will often look at gross profit and operating profit as well.
  2. Investing

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  3. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  4. Financial Advisor

    Corporate Profits Fall, But They're Still Too High

    Corporate profits are falling--but is it because profits were too high in the first place?
  5. Trading

    Day Trading: Top Scenarios To Take Profits

    Three ways to take profits while day trading, based on price movement and what the asset is doing that day.
  6. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  7. Investing

    When to sell a stock

    Buying at the right price determines profit, but selling a stock at the right price locks it in.
  8. Trading

    Profiting In Bear And Bull Markets

    There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage.
  1. What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between ... Read Answer >>
  2. What is more important for a business, profitability or growth?

    Discover how both profitability and growth are important for a company, and learn how corporate profitability and growth ... Read Answer >>
  3. What factors affect my profit margin most?

    Discover what can influence the profit margin for your company in a positive or negative way. Find out about qualitative ... Read Answer >>
  4. Gross profit, operating profit and net income

    Learn about the relationship between gross profit, operating profit and net income – and about how these financial metrics ... Read Answer >>
  5. What is the average profit margin for a company in the oil & gas drilling sector?

    Understanding the profit margin is an integral aspect of analyzing whether an oil & gas drilling company is a worthwhile ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center