People often ask what sort of behavior should be expected in case of a stock market crash. Experienced investors, having spent years dealing within the stock exchange have no idea what an ideal behavior for an investor is during a crash. Questions such as ‘Why are stocks down?’, ‘When should we expect a stable market?’, and ‘Is investing during such a time smart?’ are often thrown around in order to better understand what can be done in such a situation.
This time last year, the world saw a wave of a potential recession, as the coronavirus was declared a pandemic by the World Health Organization (WHO), and things have been unstable ever since. It is reassuring to remember that things are not as bad as they were when the virus first spread internationally, the stock markets all went haywire. The damage caused by the halt in economic activities from travel to the supply chain was enormous. Even though things are believed to be restored to a somewhat steady position, you cannot expect things to turn out predictably as long as the deadly virus is still out there.
Regardless, there are a few common stock market-related questions that this article is going to address. It is better to be informed to understand your financial environment and what to expect in the near future.
What happens when the stock market crashes?
In layman’s terms, a stock market crash is when the share value goes down significantly. The investors are forced to sell their shares at a much lower price too, to salvage whatever they can of their investment. It is called a crash because the graph indicating share price and value literally goes down in one quick motion instead of a normal gradual decline.
We’ve seen multiple crashes in the stock market in history and all of them have prepared to prevent one in the future, if not taught us how to deal with such a situation. It is also said at multiple platforms that the concept of a stock market crash is so scary for investors and traders alike because of its unpredictability, both in occurrence and in nature. Even though according to the statistics, if the stock market drops by 10% in one day, it is indicating a crash but any other signs of significant instability can also cause a rash. Therefore, the definition of the cash is not as concrete and clear as we and the investors would like it to be.
How it really works is a lot more psychological that people let it on to be. The investors that own stocks within any company do so in hopes that the company will perform good and will get them better returns on their investment. In case of a crash, investors try to bail out due to panic that they will incur losses in case the share value or price goes down before they sell it. The role that panic and concern of investors plays in this entire phenomenon cannot be disregarded.
In many aspects, the stock market is indicative of a country’s financial health, even if it’s only the public listed companies. In a country such as America, the stock market holds a rather significant position in the overall well-being of the economy. It’s a risky business to start with because the workings all depend on the predicted performance of the companies listed in the stock markets.
What should I do if my stock goes down during a crash?
In an unpredictable economic situation such as one we are facing today, with the Gamestop fiasco happening within the first month of the year, we need to be prepared for any kind of turn things may take. There are many aspects to be covered and looked after in case the stocks go down again as they did during the start of the pandemic, which was caused by panic and dread of the uncertain future. In case of a crash again in 2021, here’s a list of things you need to look after:
- Avoid panic that might be caused in the wake of an unforeseen future. Although being in the middle of the pandemic puts us ahead of where we were when this first started, the new developments with vaccine passports and the new variants of the virus all still hint that uncertainty might prevail longer than our expectations.
- Prioritize your spending with importance to necessities. This is very closely tied to the above point, if you start panicking about the situation, the fear might lead you to make uninformed/impulsive decisions. Make sure you plan this out in a proactive manner, from living expenses, food & groceries, rent, utilities, to tuition in case you’re a student, line out everything well and include an emergency fund to the list. You’re not going to regret being safe in case nothing goes wrong.
- Another major thing panic makes you do is sell out your investments in fear of losing money at the worst possible time. Waiting out the downfall is a smart move many forget. If you have the income you can spare, invest a small percentage to stocks, it is no different than the circumstances under which you normally trade in stocks, buying at a lower rate, selling at a higher price.
- Lastly, in case you want to make a fool-proof safe passage through the financial turmoil, consult an investment professional regarding your particular situation, that accounts for your portfolio, expenses, funds, retirement accounts etc. Advice specific to your situation can help you assess and respond accordingly.
How does the pandemic affect the stock market?
The pandemic has affected the stock market severely since the start, and there’s no definite way to say if it will remain stable or growing this year. Regardless of a majority of analysts suggesting a steady surge in the stock market with vaccinations, reopening of several industries, and growth in the biotech sector, the looming unpredictability stays with us and we cannot rule out what 2021 might bring to us.
The new variants which are considered more severe, the inflation component and the growing unemployment rate are the major problems caused by the pandemic, affecting the stock market negatively. As much as the industry wants to focus on the positives, there’s no denying what is part of this stage in the pandemic. Things seem to be okay in the stock market as of yet but nobody can tell what might happen. All you can do is educate yourself and be prepared.
What happens if stock price goes to zero?
This scenario is different for investors who invest in different types of securities. There’s something called long position and short position investment. In case of long position, a stock losing all it’s value means severe loss to the investor, however, in case of short position, which is when an investor sells off an investment to later buy it out at a lower price, the investor is at benefit, because they do not need to spend any money buying the stock which is already at zero.
This is a question that is not exactly the same as ‘why are stocks down and what should I do about it?’, but as an investor, knowing your market is a good move even if it’s a long shot. To conclude, your investment type matters to how you get affected by a stock downturn.
Can you hold your shares hoping to go up even after the stock price hit zero?
As mentioned above, different investors have different motives behind their investments. But as a long term investor, there is no harm in taking a decision to continue investing in a company after the stock price has hit zero because there’s no further downfall from there. Your investment can turn around from there because all of stock market works based on demand and supply. There could be investors who want to invest in the company you own stocks in, therefore holding your share is not an altogether bad decision.
These were all the questions regarding stock market, coronavirus and a plausible crash in 2021. Whether you’re an investor or just a spectator, there’s no denying that we’re possibly living within a future history lesson. The best thing to do right now is to be prepared in any case.