Over time, the market rebounds and prices rise again after falling. This has happened over and over, generally with an increase above previous prices.
Falling stock prices cause panic in some investors, but fluctuations in the market represent business as usual. Investors who are comfortable with this reality know how to hold their investments and how to recognize investments that are good purchases when stock prices are dropping.
Some keys to making a profit from an economic downturn are to ignore your panic mode, purchase stocks at reduced prices, or build a diversified portfolio which should include bonds, stocks, and mutual funds.
Falling Stock Prices and Instincts
Human nature is to follow the crowd, and investors in the stock market are no different. If prices are going up, the knee-jerk reaction might be to hurry up and buy before prices get too high. However, this often means that you’re rushing to buy a share of stock for Rs. 5000 today that you could have purchased for Rs.4500 yesterday. When thinking about it that way, the purchase seems less attractive.
The opposite is also true. If prices are falling, people often rush to get out before prices fall too far. Again, this might mean that you’re selling a stock for Rs.4500 that was valued at Rs. 5000 yesterday. Reacting in this manner does not help an investor make money.
If you’re in the market primarily to build your nest egg (long-term growth), most often the best course of action is to do nothing and let the long-term growth take place. It is possible to make a profit from falling stock prices if you are quick, and purchase a stock for less than the price you can sell it for—but this can be tricky, and is more in line with the unreliable method of market timing (which is more similar to day-trading than investing).
Falling Stock Price Strategy
When You Should Buy Stocks
If Your Stock Prices Drop
The time to look for investments to buy is not when stock prices drop—you should find these when the market is performing well. Look to identify companies that have weathered economic crises before, and purchase those stocks after prices have fallen.
Purchasing stocks when prices are lower generally leads to profits when the prices rise again—they always do. The market, economy, and stock prices all follow a cycle. In general, the market has been in a continuous climb for quite some time.
Although you are sitting on a substantial loss of more than 33% of the value of your holdings, you’ll be better off holding it in the long run for two reasons:
- If you reinvest your dividends to buy more stock, you increase your ownership in the company. Also, the dividends will purchase more shares at a reduced price. In other words, the further the stock price falls, the more ownership you can acquire through reinvested dividends
- If you have additional investment funds available, you might do well to buy more stock at lower prices. If you truly are focused on the long-term outlook, the short-term losses of stock price drops are less significant.
There would be great chance to
Build A Portfolio For Falling Stock Prices