What To Do When The Stock Market Crashes

by Smita Mohta on Equity Market
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Introduction

Stock market crashes happen due to fear and panic. Most of the time there would be panic selling that drags the overall market down when the going gets tough. Learning about the stock market will help to understand about this situation.  When the market crashes, a layman would press the ‘panic button’ but an investor would see it as a ‘bumper sale with a heavy discount on his favorite stocks’.

Below are some of the market crashes in India in the last 20 years, but the market recovered every time it fell.

  • March 31, 1997

The Indian market was taken aback by ‘Asian Financial Crisis’ in 1997. BSE Sensex lost 8% on 31 March 1997. After some years BSE Sensex gave a return of 16%. Besides, 3-year return from that day was 49%.

  • May 17, 2004

This crash was due to unexpected defeat of NDA (UPA 1 won the election supported by left parties). The market fell 11% in a single day. But one year after the crash, BSE Sensex gave return of 44%.

  • October 24, 2008

Indian stock market crashed 11% on 24 October 2008 following the crash in US market on the 2007-08 financial crisis. However, recovering from the crash, BSE Sensex gave 92% return in one year.

  • November 8, 2016

Here the small crash was because of demonetization. Sensex traded around levels of 27,500 (the Sensex fell for a couple of weeks from 8th November and marked a 52-week low of 25,717 on 21st November. But one year after the crash BSE Sensex zoomed almost 6000 points to a level of around 33,500.

Every time market crashed, it rebounded and touched new highs. It is clear from the above that after every crash BSE Sensex has given phenomenal returns in long-term.

stock market crash

So what should you do.

There are only three things which you can do in case of a stock market crash:

  • STAY CALM

The first major thing you should do is to REMAIN COOL. Remember that stocks cannot go up forever and crashes are just a part of the process. During the stock market crash, the so-called “investors” start panicking and they become fearful. When fear takes over, then investors make decisions laden with emotion and Guess What…?

They end up selling low all good companies and end up buying same companies at a high price.

If you stay calm you can see things clearly; you will see that you should stay invested.

  • STAY INVESTED

History of financial markets is full of crashes and after every crash stock market rebounded and made new highs. Losses are only notional until you can actually sell out. If you sell out, you will lock in your losses and kick out of the game for the growth of your Bank Balance.

  • CONSIDER BUYING MORE / PUMP IN MORE MONEY

The stock market goes on sale during a crash and you can profit from it by buying more shares. It is good to buy in regular intervals as you can never envisage where the bottom is.

Buy shares of good businesses/fundamentally sound companies that generate real profits and have given attractive returns on equity, have low to moderate debt to equity ratios, have improving gross profit margins, have good management, and have at least some franchise value.  These firms recover faster and give you good returns. Stock Market crashes give you the opportunity to buy good businesses at great price.

Bottomline

This is not something many investors can do and it takes/requires courage to buy in blood hit market.

I would also quote Warren Buffet’s amazing investment idea:

A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.

I hope you found these tips useful.


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Disclaimer

Elearnmarkets.com wants to remind you that all our content is created solely for the purpose of education. No strategy, stock, commodity, fund or any other security discussed here is any way a recommendation for trading or investing. Elearnmarkets.com will not be any way responsible for trading losses incurred by any individual or entity for trading with real money. Please take advise of certified financial advisers before trading or investing.

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