Profit taking is the act of selling stock to take advantage of a sharp rise in the stock price.
How It Works
Occasionally, investors will sell off their shares in a stock after the stock rises sharply. It may occur as a result of an event that triggers a rise in the stock or when a stock just follows the broad currents of a bull market. It may also occur when traders are looking for the opportunity to sell and even a small surge in the market brings new buyers willing to pay sellers' prices.
Why It Matters
Selling off shares, however, causes the price of a stock to fall, at least temporarily. Generally, though, profit taking is seen when there is an upward trend in the overall market.