Everyone prefers to invest when the stock market is on a high. However, when the market is falling, then investing becomes a real challenge for the investors. If the stock market witnesses a significant correction for the few days, then it leads to chaos among the investors, especially the beginners. It is often during the bearish stock market when most of the investors make big mistakes as they remain clueless and end up taking wrong decisions, which ultimately results in the loss of hard-earned money.
What should investors do when their confidence is shaken because of the bearish market? In such a situation, there are some big mistakes to avoid in a falling stock market, which are mentioned below:
This is one of the biggest mistakes of the people when the market’s downturn. However, it is important to remain calm in such a situation. If you decide to leave the market immediately without knowing about the actual reasons for the falling market, then you may miss out on a golden opportunity to make money in the event market rebounds. During the stock market crash, it is important to plan a strategy rather than getting panicked. The fall in the market is temporary and it may be because the market is correcting. If you have invested in the market for the long-term purpose to meet your financial goals, then it becomes all the more important not to get panicked.
Stopping Systematic Investment Plans (SIPs)
Most of the investors, often get panicked when the markets are falling and tend to have an impression that the bearish market will lead to a negative impact on their SIPs. However, in reality, this is not the case. A large percentage of the investment in the SIPs is done for the long-term purpose and any short-term market volatility does not affect them. Instead, many mutual fund managers tend to purchase more equities when the market is plunging to take advantage of the Rupee Cost Averaging (RCA). This will really prove to be beneficial when markets rebound. Hence, planning to stop the SIPs is not a profitable option in a falling stock market.
Buying Penny Stocks
There is a saying ‘High Risk, High Profit’ and going by this thought, many investors just get tempted by the idea of getting more shares in a falling market at the lesser price. They generally buy penny stocks that are mostly small-cap stocks and available at the lower price. This is one of the biggest mistakes they are making and must be avoided. The penny stocks may look like an attractive investment because of the lower price but the low liquidity of these shares may pose a lot of problems during the falling market as you may not find the buyers. Moreover, if the shares get delisted from the stock exchange, then you may lose all your hard-earned money. Hence, it is proved that taking the risk of investing money on the penny stocks do not yield the higher profits or returns all the time, particularly in a bearish market.
Buying Shares from Borrowed Money
In an attempt to take advantage of the Rupee Cost Averaging (RCA), most of the investors run to purchase the shares, which are fundamentally strong. For those who do know, these are shares of those companies that will continue to do business even when the markets are falling. No doubt, it is a great strategy to prevent the losses but make sure that you do not end up overbuying the shares, particularly when you do not have capital or cash in hand. Borrowing money to invest in the fundamentally strong shares is not a great idea because if the price of these shares falls further, then it becomes extremely difficult to repay the borrowed amount and eventually it results in losses rather than profits. This is because if you have borrowed from the broker to buy the shares, then you are required to at least get the rate of interest, which you have to pay on the borrowed amount. Hence, if you borrow to invest in the shares, then keep in that you cannot afford to lose.
Overlooking New Developments in the Market
It is also one of the biggest mistakes that many people make while the stock market is falling. Any new developments or positive news can have a significant bearing on the share prices. Hence, it is highly important that you must not overlook any significant developments or happenings in the market, otherwise, this could lead to a major blunder. It pays well to be well-informed and taking the investment decisions after taking the stock market trends into consideration. Taking any investment decision without proper research or correct information is altogether a bad idea.
Changing Financial Plans
It is important that you must not let emotions cloud your judgment. If you panic in the event of a market fall and change financial plans, then it is a poor decision. You must hold on to your stock market investment portfolio rather than exiting it. Your decision must be based on the current market trends. The fall in share prices may be due to any reasons and this must not prompt you to alter your financial plan as long as the fundamentals of the shares in your portfolio are strong.
In a nutshell, when the stock market is falling, then it is one of the best times to test your skills. Instead of getting panicked, it is important to be calm, must have a clear understanding of the fundamentals and maintain an investment discipline. Hence, you must avoid these mistakes in a falling stock market and take the correct investment decisions to realize your financial goals.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.