The stock market, also known as the share or equity market, is the aggregation of buyers and sellers of stocks or shares of businesses. Individual investors, institutional investors, and publicly traded corporations can invest in the share market through electronic trading platforms or stock brokerage firms. The stock market is considered the primary indicator of a country’s economic development.
The stock market is highly volatile by design. As such, people tend to invest in stocks after careful consideration. Here, we take a look at how stock market crashes can help investors and those who have just started out.
What is a stock market crash?
When there is a dramatic decline in stock prices and results in a significant loss of paper wealth, it is known as a stock market crash. It is driven by underlying economic factors and panic selling. Stock market crashes offer an opportunity for wealth creation if you can get in and stay invested for a long time.
How can stock market crashes help young investors?
Young investors stand a chance to benefit from a stock market crash because of the following reasons:
- They have age on their side – While old investors hesitate to invest in the market fearing another crash, first-time investors or those who have age on their side can opt to participate in the market again. Stock prices usually see huge rallies following a crash. Be it the Nasdaq dip or the Wall street collapse or fall recorded in Bombay Stock Exchange SENSEX, markets tend to rebound after a crash. Given this fact, the money invested can grow over a period of time and result in huge wealth creation.
- They have lesser short term requirements – Compared to old investors, those who are young can keep their funds invested as they don’t need to worry about short term requirements like children’s education, marriage etc. Staying invested can help them in earning good profits, if the markets recover, which seems to be the case if past instances are considered.
Who benefits from stock market crashes?
As and when the stock market crashes, there are certain sectors that benefit. These are – utilities, consumer staples and the healthcare sectors. This is because all three sectors are necessary to run our daily lives. Irrespective of how the economy is performing, the shares of utilities, consumer staples and healthcare will continue to buoy the returns. So, it is beneficial to invest in these sectors as it can cut down the losses if any as well as make sure that the invested money continues to grow.
What goes up when the stock market crashes?
When the stock market collapses, traditionally the price of bullions like gold, silver and bonds increase or remain stable. As gold and silver hold their value over a period of time, the volatility in the market makes them attractive. The increase in demand pushes the rates up. The same is the case with fixed income instruments like bonds as it comes to a stable return irrespective of the existing market condition.
There is no denying that investing in the equity market is tricky given its volatile nature. But if investing is done after evaluating the pros and cons, the returns can be quite rewarding. Starting to invest from a young age and staying in it for the long run can go a long way in ensuring that the investments turn fruitful.
What Existing Investors can do
Now that we know about what window of opportunity young investors have during a stock market crash, let’s throw some light on the impact on existing and long term investors and what they should do.
First and foremost, start buying more stocks if you can
- Any stock market crash brings in a perfect opportunity to buy more stocks. If you have enough savings and have other investments that generate income for you, this is the right time to buy more stocks. The reason is, whenever there is a stock market crash, it clearly signifies that the prices are down and this is the perfect opportunity to buy shares at low prices and sell high.
- The thumb rule of the stock market is to buy low and sell high. In a stock market crash, more short-term and long-term stocks can be bought. When the market is up and running again, these stocks will definitely book profits.
A stock market crash can open a door of opportunities not only for young investors to start their investment journey but experienced investors can also discover something new which can bring in profit even in that volatile condition. Always remember to do due diligence before investing in stocks.