During the recent stock market fall, many investors were left flabbergasted by the rapid demise of the once hot stock. Some stock analysts and traders opined that it was inevitable, others blamed it on greedy short-term investors, yet others pointed to an intricate series of mistakes and missteps. Whatever the cause, what is common knowledge now is that many stock markets have suffered a spectacular collapse, and it is important for any investor who has made or is considering purchasing shares to become familiar with the do’s and don’ts during a stock market sell-off. By doing so, an investor can avoid making costly mistakes that could see their hard-earned money drained before their very eyes.
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Perhaps the most common mistake made by a smart investor during a bear market is expecting the price of a stock to continue to rise. When prices fall from a high peak, investors typically panic and sell off all of their stocks in hopes of recouping any losses they may have made. The logic used by those selling is that they bought at a price that was artificially high, and that price should reflect what the company is worth once it has fallen to a new low. However, most investors are in denial; they believe that the downward trend will continue, and that the price of the stock will continue to fall. As a result, they sell their stocks for lower than they paid, netting a profit for themselves as they prudishly liquidate their assets. This are the Do’s and don’t during a bear market.
If an investor does not have a sufficient amount of capital to cover any anticipated losses, they are forced out of the stock as it slides downward. What are some of the reasons why this may occur? An investor who is holding onto their stock for too long may be waiting for the price to fall far enough so that they can sell, without realizing that they have held on for far too long. Another reason why an investor may hold onto a stock is because they think the market may rally again. Investors will typically make money in a bear market lasts only for a short period of time. Investors need to know when the market will return to a bull market, so they can plan accordingly.
During a bull market, an investor will most likely make money by buying and holding their stocks. In a bear market, the profits are much smaller because investors tend to become more conservative and buy their stocks at a cheaper price. If an investor is starting out with small capital, they may want to buy mutual funds that deal specifically in stocks. There are many brokerage firms that offer specialized stock investment programs.
Those investors who are brave enough to sell at a profit when a bear market is about to begin will have the best chance of turning a profit. However, it takes time to find out when a stock is overvalued or undervalued. A trader should research potential stock picks so they can determine which companies are best to buy at a given point in the future. If an investor takes the time to properly analyze a stock, they will have a much better chance of turning a profit rather than taking a loss on every trade.
One of the most important rules of stock market investing is to know when to walk away. Don’t hold on to stocks you aren’t prepared to sell. Holding on to a stock that is doing well enough to climb back to a previous price level is always preferable to selling. It may seem tempting to hold on to a stock that has already dropped, but an investor needs to evaluate the reasons for the drop in order to determine whether holding on is the best option. As an investor learns more about the process of stock market investing, he or she will be better able to decide when it’s time to get out.
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