Have you heard about stock market crash before? What does it mean to you? What is your reaction to it? The thought or fear of stock market crash usually discourages many people from investing in the stock market. But if you ask these people what stock market crash is, they will give you all sorts of definitions or explanations. You hear people saying something like, “Stock market crash is when someone invests in stonother person once told me that “you can say that there is a stock market crash if people are no longer interested in buying shares”. Well, these explanations are partially correct but they do not clearly define the term. Stock market crash is a word used to describe a situation whereby stock prices fall suddenly and rapidly. This is not just about a drop in a stock price. It usually cut across a significant number of stocks in the market. In fact, within just a three to five days interval, investors can lose up to 30% of their investment any time there is a crash in the stock market. The situation becomes worse as almost investor will be willing to sell off their stocks in order to quickly cut short their losses. This makes share to continue to fall rapidly. Please note that there is no particular benchmark for the level of loss investors can record any time there is a market crash. We all understand the law of demand and supply. When you have many people selling with few people willing to buy, prices will come down. Stock market is not an exception. To tell you the truth, investors usually lose money any time during stock market crash. Let’s have a flash back of the stock market crashes that have happened in the past:
Stock Market Crash justify;”>Stock Market Crash History
|October 24, 1929||The Dow Jones Industrial Average dropped 25 per cent|
|September 29, 2008||The Dow Jones Industrial Average declined by over 700 points (6.98%) in intra-day trading.|
|October 19th 1987||The Dow lost 22.6% of its value in one day|
|2000||Dot com Bubble Crash resulting to The Nasdaq Composite losing 78% of its value|
|May 6, 2010||Flash Crash when Dow Jones index lost almost 9% of its value within minutes|
|June 12, 2015||Shanghai stock market crash resulting to 30 percent fall over three weeks|
The effects of this could be devastating especially to retiree that relied solely on stocks as their source of income. Even it could cause a serious setback to people planning for retirement or people investing in order to have enough amounts of money set aside for down payment for mortgage. While people look at stock market crash as something that is entirely bad, I will like us to look at it from a different angle. Please, I don’t want you to misquote me. I am not saying that it is a good experience for someone to lose its investment into the stock market. However, there is a saying that one man’s meat is another man’s poison. What brought one person down may be a reason for the rise of another man. But before I go into this, it is good that we have a retrospective view about happenings that usually precede crash in the stock market.
If we go by the history of the past stock market crashes, one thing they have in common is the report of sudden rally in stock prices. It was gathered that before any market crash, stock prices rose rapidly even beyond what they were worth. People invested without much regards to the earnings of the companies. For instance, record has it that equities prices on the Shanghai Exchange increased more than 150% within one year that preceded stock market crash of 2015. The stocks listed in Shenzhen Stock Exchange also witnessed the same experience. The Stock market suddenly became the “only thing” to invest in for any smart guy. People who were not involved in stock market suddenly picked interest in buying stocks. In fact, one thing I remember vividly about the last stock market crash that happened was how people were borrowing money to invest in stocks. Some of my colleagues were doing it. Even, stock brokers were not left out. Everybody wanted to enjoy the high and quick returns on their investments.
All of a sudden, the bubble burst. That is just the characteristic of any bubble. It will pop when you least expect. When it first happened, people were holding to their stocks hoping that the prices will soon rally up again. This was a denial stage. A lot of them were not willing to sell their stocks in loss since they invested borrowed money. Their aim was at least to break even. If at all they could not make profits, they wanted to recoup their money. At least this would make them to be able to pay back their loans. Unfortunately they were totally wrong. The prices continue to nose-dive by the day. Some of them lost as much as 50% of their investments. This experience made some of them and other people that knew what they went through to vow never to invest in the stock market again. Well, this is expected from any natural man. But I want you to understand that there is no investment that doesn’t involve risks. Any time you invest your money; there will always be a risk that you may lose your money. But the degree of risks on different investments may be different.
How to take advantage of stock market crash
If you ever witnessed a stock market crash, it could be a good opportunity for you to accelerate your financial breakthrough. How? This can be achieved through the following:
Invest in Income stocks: Income stocks companies are known for consistent payment of dividends to their shareholders. Companies in this category are usually stable with high earnings. However, in the time of stock market crash, stock prices fall generally and this cut across a cross-section of almost all the stocks listed in the stock exchange. This means that you will be buying the stocks very cheap. With this, you will be able to buy a large number of stocks. Since income stocks companies are stable, a crash in their stock price does not necessarily mean that their earnings will reduce. If they should maintain the same dividend per share they usually pay their shareholders, this means a better returns if you invest in the stocks. Stock market crash has a way of compensating shareholders with higher dividend yield. Let’s illustrate this with this example. If Mr. “A” bought 10,000 units of shares of Company XYZ at $10 per share, the cost would be $100,000. Let’s assume that the company declares a dividend per share of $1. The dividend yield will be 10%. Dividend yield is calculated by dividing dividend per share by the company’s share price. Let’s now assume that there is a stock market crash leaving the stock price to drop to $5 per share. Investor “B” may want to take advantage of this by using his $100,000 to buy 20,000 units of the company’s share at $5 each. If the company declares the same dividend of $1 per share, the dividend yield will be 20% this time around. Of course, income stocks companies may be able to declare the same dividends they were paying before stock market crash happened as this may not affect their earnings. In most cases, stock market crash is usually triggered by panic in the market. It may have nothing to do with the company in particular. So, if it happens that the stock price fails to grow, the higher dividend yield will compensate investors for this. Market crash may last for years at times. That is why investing in income stocks is good during this period.
Invest in growth stocks: Growth stocks have potential to grow in price. These may be stocks of new companies or emerging markets. Investing in growth stocks after market crash can lead to high capital appreciation. You are simply taking advantage of the low price with the hope that the price will grow in the future. The problem with investing in the growth stocks is that, you don’t know how long the market crash will last. If the market crash is prolonged, you will be tying down your money unnecessarily. Also, there is no guarantee that the company will not fail.
Invest in foreign stocks: What have foreign stocks got to do with stock market crash? I told you initially that if you witness a market crash that it may be an opportunity for you to accelerate the building of your wealth. The truth is that market crash does not occur regularly. This implies that you may not have the opportunity of enjoying this advantage over a long period of time. Nevertheless, there is a good news. You don’t need to wait till the stock market in your home country crash before you can make tap into the opportunity it offers. We live in a global village now. If there is no market meltdown in your country, other country may be experiencing it. With an online brokerage account, you can conveniently buy stocks that are listed in another country from the comfort of your home. However, you need to inquiry from your online brokerage firm if the service will be available to you. What this means is that, you may be in US and buy stocks that are listed in China Stock Exchange. For example, after the China stock market crash of July,2015 when the Shanghai stock market fell by 30% within three weeks, it was reported that by the end of the same year, the Shanghai Composite Index increased by 12.6% making it to out-performed S&P for 2015. Although the market slumped again in January and August 2016, the market has been able to make a come back gradually due to government intervention. Not without saying it, even though investing in foreign stocks can help diversify your portfolio, it also poses additional risks. You will be investing in companies you don’t know. The information you gather on the internet may not be sufficient for you to make informed investment decision.
The main advantage of investing after a stock market crash occurred is that, you will be buying quality stocks at low prices. From the history of stock market crash above, you must have noticed that it doesn’t happen every time. It is just like a plane crash. Plane crash does not happen frequently like road accidents. But each time there is a plane crash, the news go round the whole world. However, that should not mean that people should abandon travelling by air. Doing so may mean wasting of many business hours on the roads. Unfortunately, that does not mean that roads are safer. Therefore, instead of running away from investing in the stock market, I think the best approach will be for us to learn from the past so that we don’t fall victims of the next crash. It will be good for individuals to set their entry and exit points. If you have made a particular level of returns from the money you invested in stocks, there is nothing bad if you quickly exit the market. Exiting the market especially when the market is beginning to heat up may be a wise decision. Unfortunately, many people want to make the whole money in the stock market without leaving anything behind. This kind of people may end losing everything back to the market any time stock market crash occurs. Just like the name, bubble will not tell you when it is going to burst. It takes discipline to be able to close your eyes and get out from the market when everybody is rushing into the market. When people are rushing into the market, that is when experienced investors take a bow. On the other hand, when people are scared of entering the market especially after a major stock market crash, experienced investors know how to quickly take positions in order to take advantage of the low stock prices.
I like to conclude by saying that this article should not be seen as a professional advice. It is just my personal opinion which may not fit into your situations. Therefore, it will be recommended that you seek advice from your financial planner before you make any investment decision.