How to prepare for a stock market crash?

Highlights

• Positive news, such as a technological development or a favourable government policy, can positively influence a stock market. 
• On the other hand, an unfavourable development, such as the emergence of a new COVID-19 variant, can also impact the stock market dynamics.
• Hence, it would not be a bad idea to be prepared for unexpected market downturns in order to keep your hard-earned money safe.

Stock markets are a dynamic and multi-factorial space. Positive news, such as a technological development or a favourable government policy, can positively influence a stock market. 

On the other hand, an unfavourable development, such as the emergence of a new COVID-19 variant, can also impact the stock market dynamics and adversely affect stock prices.

Hence, one should always mind the volatility factor while investing in the stock market universe. It would also not be a bad idea to be prepared for unexpected market downturns in order to keep your hard-earned money safe.

What exactly is a stock market crash?

A stock market crash is a situation when the value of stocks drop sharply over a short period of time, generally triggered by some event.

To be specific, a market crash is more dramatic than a market correction, which usually pushes stock prices down by about five to 10 per cent multiple times in a day.

A market crash, on the other hand, triggers stock prices and major benchmark indices to incur double-digit losses over a short span of time.

Also read: Trading signals and indicators: what your trading toolbox must include

What causes a market to crash?

Generally, stock markets crash due to unfavorable circumstances that can impact the performance of publicly listed companies and the economy as a whole, such as a global pandemic, wars, etc.

Considering that these events can lead to staggered operations or financial instability in a company, their stock prices, in turn, can also be affected.

Such concerns can be seen triggering massive panic-induced selloffs as investors look to avoid further losses.

With masses of investors trading in their stocks and very few showing interest in buying any, the supply and demand balance in the stock markets is left disturbed, giving way to sharp price falls and causing the ‘crash’.

So, how to prepare for a stock market crash?

As there are countless elements that can affect a stock market’s environment, no one can exactly predict when it can crash well ahead in time.

What one can do, however, is prepare for such a time to safeguard their invested money.

Here are a few things that you can do.

Image source: © 2021 Kalkine Media®

Emergency fund

A stockpile of liquid cash that can be accessed quickly is known as an emergency fund. Having one can give you a little relief during market mishaps.

This emergency fund should ideally possess a minimum of three months’ worth of liquid cash in a secured account.

Balancing risks with rewards

One can also trade stocks to maintain asset allocation while rebalancing their investment portfolio.

To put it in a more comprehensive manner, when an amount invested in stocks grows notably, investors can choose to sell the stock when it reaches the pre-determined level balancing the volatility risk and rewards.

Know your investment portfolio well

It is always good to keep track of all the stocks in your portfolio and brush up on their fundamentals and financials regularly. Market updates and trends can also help you in navigating the changes in stock market.

For instance, if a company in your portfolio is not offering competitive advantages anymore, you can exit that stock and instead invest in one that provides you a competitive edge to reap significant profits.

Also, maintaining a stock wishlist can be good, so that you can quickly tap the investment opportunities at the right time and lock notable returns.

Market crashes eventually pass

Disregard of how low the stock prices dip, stock markets are known to recover from crashes.

The recovery time may vary, depending on how bad the crisis was and when/how it is mitigated. But over a period of time, you can see the prices slowly rebounding towards their pre-crash levels.

Also read: Planning to invest? Here are few tips for women investors

Bottom line

While a market crash can rattle things up for a while, investors can avoid massive losses by investing in quality stocks that are more likely to pick up pace when the market rebounds.

At the end of the day, stock market trading is a game of risk and rewards. If you play your cards right, do your research well and invest in healthy stocks, you are likely to survive a market crash in due time.