What to do when stock markets crash

What to do when stock markets crash

When share prices fall sharply, there is a tendency to press the panic buttons and pull money out of equities. During such times, people contemplate buying gold. However, those investing regularly in the market must be aware of what a sharp fall in stock market does to company’s share prices. It is important to know that before you hit the sell button on equities and buy button on gold.

Here are pointers that explain the steps to take during a tumbling stock market: 

• No short-term view: Do not take a short-term view on the market and investing. Avoid ‘day trading’ as it is not for the faint-hearted when bottoms fall. There is nothing like a quick buck. Day traders are people who buy and sell shares without owning them during a single trading day. 

 • It ain’t over yet: When shares fall sharply, there is a cascading impact on the financial markets. Many people borrow and invest in stocks. As bottoms fall, lenders tend to offload shares held by them as security to cut losses. That triggers a further negative sentiment in the market. As of June 2015, advances against shares stood at Rs 5,200 crore, according to the latest RBI Bulletin. This means lenders held shares worth twice that amount. When the value of the security given falls, the borrower has to either give more security or banks resort to selling. Either way, it adds to the overall selling in the market. 

 • Gold: When there is panic in the financial markets, people tend to seek refuge in precious metals like gold. Gold remained firm on Monday at Rs 27,300-levels. However, it is a good idea to wait and watch before pressing that panic button. Yes, you may see some erosion in the market value of your stock market investment. But this could be temporary. Share prices do not move in a straight line. They move in cycles. You can always wait for some time before switching to gold from stocks or cash. 

 • Focus on solid companies: If you own fundamentally strong companies, you must just ride the storm. The logic is simple. These stocks can bounce back quickly when it is over. This is not a moment to be a hero. You should stick to beaten down solid companies that belong to the BSE Sensex and the NSE Nifty indices. You must get rid of risky mid-cap and small-cap companies that you directly own. 

 • What are solid companies when everything falls: When foreigners sell due to problems worldwide, money is pulled out of stock markets. This puts pressure on the currency. The Indian rupee fell below Rs 66 to a US dollar this morning. A falling rupee helps export-oriented companies like software services and pharmaceutical companies. A falling rupee adds to the profits of such companies when after currency conversion. This is why IT stocks do well. For example, when the BSE Sensex slumped 6%, Infosys fell only 5%. Shares of ITC fell 2.7% and Hindustan Unilever fell only 2.3%. A downturn in the stock market does not mean people do not smoke cigarettes or consume less food.

Happy Investing

Source:Yahoofinance.com