A stock market crash is one of the most sensitive subjects associated with investments. Market volatility is an aspect of the stock market, where the prices of securities like shares and bonds rise and fall. We aim to simply what it means when a market crashes. Though there may be an absolute fear of these crashes, we will also tell you what to do under those circumstances.
A share market crash is marked by a sudden and often unprecedented drop in stock prices. Its adverse effects often lead to significant catastrophic events or a bludgeoning economic crisis such as inflation. The ensuing panic among the masses of investors further contributes to it.
According to the stock market crash definition, it is characterised by a sudden double-digit percentage decline in stock indexes. What typically follows during the next few days, or in some cases, sometimes within a few hours is widespread panic among investors. This panic eventually compels most of them to sell their stocks at low prices to liquidate their financial assets.
Under such circumstances, the supply surpasses demand, leading to a market condition with more sellers than there are buyers. This fosters a market environment that is swamped with assets, while their prices slump. Economic recessions are often a result of stock market crashes.
There are implications of a stock market crash for investors, especially after most of them beat a hasty exit. As investors are faced with a sharp decline in the monetary value of their investment portfolios due to a drop in the asset prices, those who remain invested in stocks become increasingly panic-stricken and anxious. Plummeting stock values generate considerable insecurity among investors and corporations alike. One of the major economic downturns of such crashes is a severe drop in the disposable income in the society.
An immediate effect of a share market crash is the loss of money by investors who are too quick to sell off their stocks. Another scenario comprises investors who have borrowed a large sum of money for making a profit on stock assets. If the investor sells his assets afterward and even repays his loan, he or she is left with only a negligible profit.
Stock market crashes often yield adverse outcomes for investors and may deal severe financial blows to their market perspective. Invariably, banks and companies suffer a great deal after these crashes too. Organisational entities undergo significant financial losses and are forced to cut costs.
If you’re worried about the stock market crashes, don’t be. As an investor, there are ways to safeguard yourself against them. We’ve outlined a couple of steps that you can take to counter the adverse outcomes of an economic slump.
- Stay put- Easier said than done, when met with a stock crash, the best thing you can do is stay strong. If you have a sound investment portfolio in place, exiting the market by selling your assets at low prices is not the wise thing to do. This is because there is a chance that the share market will recover as it has historically been doing, and asset prices will rise again. Market timing is the key here. By sitting tight and remaining invested, you can still make a profit when the market recovers. So, during a crash, don’t submit to the urge to sell your assets at rock-bottom prices.
- Gear yourself based on adequate research- Historically, specific stock sectors have a record of better performance than some others during a stock market crash. For example, high-dividend stocks or blue-chip stocks tend to be comparatively less volatile than others. For instance, utility stocks, service-oriented organisations, food and pharmaceutical stocks tend to withstand an economic downturn far better than other organisational bodies. It is crucial to base your investment portfolio on thorough market research.
- Diversify- We can’t stress on this enough. Having a well-diversified investment portfolio or one that has the right mix of investments is ideal. Try to invest in debt and equity securities and optimise your holdings. As the general statement goes, if you put all your eggs in one basket and happen to drop it, you lose all eggs at once. On the other hand, spreading your eggs across different baskets would imply that even if one of your baskets is ruined, your eggs in other baskets will still be undamaged. More simply put, different investment instruments come with a different level of risk. While some investments may be more susceptible to stock market crashes, certain others may not be as vulnerable. Therefore, your losses from one investment instrument will be compensated by gains from other investment avenues, thereby significantly minimising investment losses.
With these pointers in your kitty, you are sure to be able to safeguard yourself against the adverse effects of a stock market crash. Also, consulting an investment advisor for advice and tips on pulling yourself through a crash is a great way to begin your journey as an investor.