what to do when stock prices fall ?

WHAT TO DO WHEN SHARE PRICES FALL?

Investors usually have an answer when it comes to rising markets. It’s when stock markets decline in a live scenario that they get nervous and confused about their next course of action. Should they buy more, sell everything, wait patiently? We share a detailed strategy on what to do when share prices fall.

First we need to figure out the reasons  of the stock mark fall?

What makes share prices fall?

There can be various factors that lead to a dip in stock markets in a live scenario:

1. Poor macroeconomic data on jobs, inflation, monsoon on the domestic front (short-term)
2. Geopolitical tension with neighbouring countries or between two countries in another region (short-to-medium term)
3. Trade wars (short-to-medium term)
4. Political condition (short-term)

Fortunately, there are ways to side-step a share price fall and continue investing in a manner that maximizes long-term wealth creation.

Here are 4 things to do when share prices fall:

• Use the opportunity to buy more shares If you have invested in a company with conviction over its fundamentals, then a stock market crash is really a godsend. You can make the most of the opportunity to accumulate the stock at every share price fall. Buying low and selling high is among the mainstays of successful investing. You also stand to benefit from rupee cost averaging.

• Let’s say, you have invested in a stock at an average price of Rs 100. A falling market presents an opportunity to buy the stock at lower prices and decrease the average cost of purchase.

• Ideal entry point in stock markets .There are some investors who look for value - i.e. when stocks are trading at discounts to their book value. A share price fall is an ideal entry point in stock markets for a variety of reasons and investors should not lose the opportunity. Also, risk is lower, when it comes to investing in stocks that are trading at lows.

• Don’t be afraid to clean your portfolio . If you have invested in a company believing it to be an ideal fit in your portfolio but it later realised to be wrong, then don’t be afraid to cut your losses or don’t wait indefinitely for share prices to correct so you can sell higher. 

• Re-balance your portfolio . A share price fall is an opportunity to review your asset allocation and re-balance the investment portfolio, if necessary. Asset allocation is about diversifying your investments across asset classes so that you are not over-exposed to a single asset like equities. Let’s say, your investment plan dictates that you divide your investments 40% in equities, 40% in fixed income or debt, 10% in cash and 10% in gold. Changes in share prices, either way - up or down, present an opportunity to revisit your portfolio and make suitable adjustments.

A fall in share prices, as we have seen, could be just what you need - be it to correct your asset allocation or clean your portfolio or lower your average cost of purchase or hunt for value investments. It is an opportunity that should not be missed.