A stock market crash is a sudden decline in the stock market that causes a significant financial loss. Market experts always advise – not panicking in this situation. It’s the time to ask yourself that how well prepared you are for this crisis and for the next one. You can consider that situation as an opportunity. So, look at the bright side for some benefits.
What is a stock market crash?
The stock market crash is a rapid and often unanticipated event that creates a significant crisis in the economic level. Investors are primarily one major contributor to the stock market. The stock market crash spread immense panic and depression among them.
The stock market crash is more sudden than a stock market correction. Whenever we face any stock market crash, market falls 10 percent from its 52-week high over days, weeks, or even months.
But we need to know that each of the bull markets in the last 40 years had a correction in stock prices and initiate bear phase. So, it’s a natural part of the market cycle that helps to welcome wise investors. Therefore, this type of pullback allows the market to consolidate before going toward higher highs.
Type of Bear market
Now, we understand that crashes in the stock market virtually come during a bear market. So, we need to understand the type of bear market exists in the stock market. There are two kinds of bear markets can be found in the long-term chart of the Indian stock market.
1. Cyclical bear markets
This kind of bear markets are relatively short-lived and occur in the context of a much larger bull market. This type of bear markets arises as the stock market swings from periods of moving up toward downturns. According to the Market Watch article report, stock prices declined just over 30 percent in the average cyclical bear market.
A cyclical bear market occurs on an average of every few years. We have seen cyclical bear markets in 1982, the tech crash of 2000, and the 2008 crash during the financial crisis etc.
Cyclical bear markets end on V-bottoms when the stock market has moved up by 20 percent off a low and then launch right back into bull markets.
2. Secular bear markets
A secular bear market is a prolonged and multi-year slump that produces a much broader decline in the value of the stock market. This type of bear markets can be last for many years even for a decade. Secular bear markets are also called “generational bear markets.”
As per market experts, a secular bear market will include a series of cyclical bear markets. Due to this bearish market, the recovery of the previous market high becomes very difficult.
Secular bear markets do not end with V-bottoms. They die on total indifference. Actually, at the time of a secular bear market, nobody wants to own stocks anymore.
What you will do during and after a stock market crash?
Frustrated. Disgusted. Angry. Concerned. Fed up.
But, a market crash is usually is an opportunity. Generally, investors hesitate to invest after a market crash. But, smart investors grab these opportunities for investment in good companies.
I like to quote here Warren Buffet’s astounding investment approach:
Buy when everyone else is selling. Sell when everyone else is buying.
From a realistic point of view how an investor reacts on the stock market crash, it depends on the weight-age of his total holdings, cash position, the variety of stocks, the cause of the crash, possible duration of a crash etc.
Impact of the Stock market crash on different participants
There are some different participants in the stock market. Now, let’s discuss what is the effect on them after due to a crash on the stock market.
1. Day traders
Such days become potential profit-making opportunities for day traders or intraday traders. Traders can easily go for short in the weakest level of chosen stock. Then buy to avoid being destroyed due to the reversal. Since they square off their positions by the end of the day, so, they are not exposed to overnight risks. But to become an intraday trader, you need to have enough knowledge of technical analysis and chart reading. Only then you can understand where to enter and where to exit. Otherwise, it can be an immense capital loss in this type of volatile situation. According to stock market expert, only experienced investors are recommended for day trading in the time of the market crash.
2. Positional traders
The stock market crash is a serious condition. Positional traders reduce the risk by either squaring off long positions or hedging long positions by shorting. Sometimes, if the downtrend has a potential to continue further, they could also add a bit to the short positions but not so aggressively. In this kind of circumstances, a wise trader always is alert for any set of stock or stock market news flows.
Investors are long-term traders. In the case of the long-term investors, enter or exit for the individual portfolio stock depends on the current average price. If you are an investor and purchased shares at a much lower average price, then the crash may not necessarily affect you. But if you want to reduce risk, then the market experts recommend booking the profit. You can re-purchase these stocks when you think the markets will recover. Of course, this strategy is only useful if the stock does not crash a lot.
4. Mutual Fund Investors
The mutual fund primarily regulated by the fund managers. Generally, in this crisis, they remove your money from small/mid-cap schemes and re-deploy it in large-cap balanced funds which have a 65% exposure to equity markets and 35% exposure to debt markets. Downside protection is much better in investment in such schemes. Therefore, it will receive some amount of guaranteed income from your portfolio even if the equity portion continues to go down or remain volatile.
How to prepare yourself for a stock market crash
Most of us become tempted to do much more things in this situation. But please remember few that will help you to keep yourself on track and moving forward.
- Remember to diversify your portfolio. That is not a single day job. Smart investors always retain review and monitor each investment regularly. That periodically will help to fight in the crisis.
- Practice patience. To survive in the stock market besides investment, you have to learn to save your money. In the market crash, experts always recommend not to enter in any stock only because it is available in low price. Remember, it took 17 months to get through the 2008-09 crash. So, do not try to catch the falling knife.
- Increase your investment time horizon. Long-term investment continuously accommodates to overcome any portfolio crisis.
- Always maintain stop loss. It always helps you save your capital. Do not forget to trail your stop losses. In this way, you can book your earned profits before any downtrend smash it.
- Stay tuned for all type of news flows. It is a healthy habit. Only then you can understand the nature of the stock market. There are lots of useful mobile apps available. Connected through these along with your daily doings.
- Never take investment advice from someone who predicts the future. Always depends on the fundamental and technical analysis.
- Keep educating yourself as much as possible. In the crisis, there will be lots of advice around you. So, you have to take your decisions at the end of the day.
Read also:Global Trade War & Indian Stock Market
What to do before the next market crash
Crisis always tests your physiological balance and stamina. Most of us become very attached to our portfolio. Yes, that’s true. But, in the time of the stock market crash, you cannot take any emotion-based decisions. So you need a proper strategy in that situation, and that can place you ahead of time. So, do not forget to ask yourself these questions time by time.
- Are my investments consistent with my goals that I have planned?
- Is my lifestyle comfortably withstanding a market crash? So I’m not forced to sell any stock at market lows that actually placed for long time horizon?
- Is there enough free cash to purchase value stock at a great price in this situation?
- How much individual stocks could be affected by a market crash?
- So what is my exit point for each?
- Do I have a comprehensive reporting of all assets, stocks, and accounts, regardless of investment location?
Stock market crashes are ugly, brutal, unnerving and can generate anxiety. But it’s not a sign of imminent financial collapse, nor does it mean that stocks are no longer a good long-term investment. Sometimes it’s created a huge loss. Keep patience. So, buckle up your mistakes and try to find the flaws in your investing style.
Unless you need cash immediately, do not go for panic selling after a market crash. Sometimes, the best thing to do is nothing. If you find some value stock, as per market experts, it is ok to go for some investments if you have money to do so. Wait until the things have cooled off. Take time to review your portfolio and then start adjustments to bring your asset allocation back into balance.
As per the current global market situation, keep yourself updated. Don’t just over analyze macro-political events. Nowadays there are loads of global and national threats circled like International wars, North Korea missile threat, North-South Korea war situation, Arab spring, US elections, Crude oil price volatility, Rupee-Dollar ratios etc. Instead, analyze what makes things really move and how much these affect your investment.
So into the end, you just need to calm down and think.
Please leave your queries in the comment section and let us know your views regarding this article.
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