Today we’ll talk about stock market crashes and how to handle them to the best of your abilities. But first, let me begin with a basic question.
What is a Stock Market Crash?
Well, Wikipedia defines a stock market crash as:
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors.
Let me break up this definition for you into simple words.
A stock market crash occurs when a large number of stock prices fall below their anticipated level i.e. their support price. This is often of a sudden nature. This occurs mostly due to economic factors which are macro in nature.
For example, when the union budget comes out, there is a chance that the stock market might take a dip.
Also, a crash is not necessarily a negative for everyone. It can prove to be positive if one takes advantage of it.
Additionally, these crashes are further driven by panic among the investing public. The volumes of trading shoot up dramatically which further help in fluctuating the stock prices.
A stock market crash can occur anytime. Therefore, it is advisable that one stays prepared for it.
What to do before the Share market crashes?
1. Anticipate It
A common mistake that investors make is that they do not expect any crash to occur.
They think that nothing of this sort can happen to their investments. But this is wrong behavior.
You should know crashes are normal and that the market will go down sooner or later.
To give you an idea of the frequency of Indian stock market crashes, here are the top 5 crashes:
The market crash of 1992 : The year 1992 saw a significant crash due to the famous Harshad Mehta scam. BSE is known to experience a leap of 12.77 percent during this crash.
The market crash of 2004 : This was another jolt to the Indian economic scenario. It was triggered due to a foreign institutional investor entering the Indian market. In this episode, market regulator SEBI found out that the crash was caused due to a foreign institutional investor UBS, which was one of the largest sellers of shares in 2004.
Market crashes of 2007 : All through the year, the Indian stock market witnessed a chain of crashes with dips of over 650-700 points.
Market crashes of 2008 : This year witnessed crashes because of the global economic climate.
The market crashes of 2015 & 2016 : The crashes of 2015 and 2016 gave major shocks to the Indian economy. 2016 crashes are often blamed on demonetization.
I hope this makes my point clear. Therefore, always expect a stock market crash.
2. Diversify your Portfolio
Diversify your portfolio. Try to invest in a variety of securities in order to lower your overall risk exposure.
This goes well with saying, “Don’t put all your eggs in one basket”.
If you have a portfolio which consists of a wide range of securities, it will work as a shield against huge losses for you.
Consider bonds for investment. Consider treasury bills, Small Saving Schemes like PPF, Senior Citizen Savings Scheme, MIS etc.,. Invest in different asset classes!
Investing in these will ensure that you don’t go 100% down in case of a stock market crash.
3. Have a Backup
During a crash, business gets lean.
There is lesser cash flow and many businesses cannot afford to pay salaries to their employees due to this.
Always have a backup plan. Know people who’ll hire you even during lean business periods.
After all, having only a single source of income is always risky.
Related article : ‘13 Strategies / Tips for dealing with Layoffs (or) Job Losses‘
4. Become debt free
Another thing to do before a crash is to free your-self of debt. This is because if you have high-interest debt during a crash, it’ll get very difficult for you to pay its interest as well as the principal amount. Do not over-leverage yourself!
Stock Market Crashed? What to do after the market crashes?
1. Be Grateful!
Yes, you read that right: be grateful!
Ironically enough, bad times turn out to be the best times for early investors.
In other words, the best time to buy stocks is when the market is functioning at its lowest.
Well, because things can only go upwards from there!
So, seize the opportunity and go shopping!
2. Curb your spending
Going through tough times? It’s time to go frugal!
Here are some simple approaches to chop down your everyday costs in each category:
Housing and accommodation
- Consider having a flat mate to part costs
- Lessen your utilities by being aware of water and power utilization
Grocery and food items
- Scale back on eating out
- Make use of online discounts while ordering food
- Purchase groceries in bulk
Make a conscious effort to build a capsule wardrobe rather than a trendy wardrobe. This way you can wear your clothes irrespective to the current trend and still be at the top of your fashion game!
- Opt for Metro if available in your city
- Opt for car pooling like UberPool
- Purchase a second-hand vehicle if you absolutely need one
Other than cutting your costs, consider a side hustle or working low maintenance work in your extra time. Every rupee saved will add to your savings pool.
3. Purchase Stocks
The best time to buy stocks is during lean periods.
Let me present the concept of support and resistance levels for a better understanding.
Every stock chart which has been plotted over an extended timeframe depicts a support and resistance price level.
These two are levels or rather, you can understand them as boundaries within which a stock’s price movement occurs.
Support level implies the bottom boundary whereas Resistance level implies the top boundary.
These two levels simply suggest that a stock’s price is not likely to fall below its support level and likewise, it’s not likely to rise beyond its resistance level. You can visualize the stock prices as a ball alternating between the two boundaries for a better understanding.
However, it is essential to keep in mind that these are just ‘predictions’ which are made by technical analysts from time to time and therefore can prove to be wrong.
For example, when the prices shot up during the announcement of the Lok Sabha Elections 2019’s results, many securities’ prices went way beyond their resistance levels.
Support and resistance levels go a long way in telling a short-term investor when to buy and when to sell a security.
When the price of a security reaches its resistance level (i.e. predicted top-most level), it is believed that the market is currently bullish in nature. Hence, it is considered an ideal time to sell that security.
When the price of a security reaches its support level (i.e. predicted bottom-most level), it is believed that the market is currently bearish in nature. Hence, it is considered an ideal time to buy that security. Similarly, if the price goes beyond even the support level, there could not be a better time for purchasing that security.
4. Go shopping!
Economic crashes are the best times to make any major purchases.
Were you thinking of buying a house since a long time? This is the time to finally buy it.
Need a Car? Go buy it today.
Why? Because when times were good, chances are many people spent more than they could afford to.
Therefore, when things go bad, they rush to sell their stuff.
- Go on MagicBricksto find your dream house.
- Go on Droom to look for that Honda Civic you wanted.
- Go on OLX to shop for the latest iPhone you wanted.
Hence, don’t buy things when you want them, instead wait for the correct opportunity to buy them.
5. Try not to sell
While you can go buying all that you need during and after a crash, try not to sell anything.
This is because prices go down a big deal during a crash. So you’ll be forced to sell your assets for a much lower price than otherwise.
And most importantly, do NOT sell stocks.
This is because after the crash, the stock prices will definitely move up and then you’ll be able to grab a better deal.
So today we talked about the do’s and don’t’s during a stock market crash.
Let me put them in a summarized form below for your reference:
What to do before a crash:
- Anticipate it
- Diversify your portfolio
- Have a backup
- Become debt free
What to do after a crash:
- Be grateful!
- Curb your spending
- Purchase stocks
- Go shopping!
- Try not to sell
This is a guest post by Dishika of getbachat.in.
Dishika is a personal finance blogger at Bachat. With her articles, she breaks down complex financial concepts into bite-sized articles that are fun to read and easy to understand. Bachat is a one-of-its-kind mobile app that helps you save money on autopilot.
Continue reading :
- 10 Rules to select good Shares/Stocks for Value Investing
- 10 Reasons to avoid Short Term Trading in Stock Markets
- How to set-off Capital Losses on Mutual Funds, Stocks, Property, Gold, Bonds & Debentures?
- How to adjust Short Term Capital Gains against the Basic Exemption Limit? | Tax Rules & Examples
- How to save Income Tax by adjusting Long Term Capital Gains against Basic Exemption Limit?
Kindly note that ReLakhs.com is not associated with GetBachat. This is a guest post and NOT a sponsored one. We have not received any monetary benefit for publishing this article. The content of this post is intended for general information / educational purposes only.
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post published on : 31-July-2019)