People say that there’s always opportunity in a crisis. This belief also applies to the stock market, wherein recessions or just red markets in general are believed to be good sources of investments that can blow the roof once things begin to stabilize.
Now, does this belief have any bearing? Short answer is yes, but finding opportunities in a red market depends greatly on some factors. Here are some things you need to consider before getting into a red market frenzy.
Background Check
It wouldn’t be a good idea to simply buy anything in a red market. It’s important to remember that such situations are comparable to battlegrounds where you can’t fully know what to expect. Some companies behave differently from others which means some will gain and some will lose and the best way to make more accurate forecasts is by researching thoroughly.
Finding companies to invest in involves a process called fundamental analysis, and an important part of this process is researching about the company you want to invest in. You have to know what type of industry they are in, if they’re relevant or not within and after the crisis, and make decisions accordingly. You also have to make sure that the company itself is managed correctly to ensure that you can expect better.
Protect Your Buying Power
While it can be tempting to think that putting more money can lead to higher rewards should a position you bought at its lowest makes a reversal at some point in the future, you must still remember to not go all out. Setting a reasonable budget is a crucial means of dealing with a red market frenzy because always remember, “You are wrong until the market proves you right,” and it might just bite you back if you don’t spend wisely.
Instead, protect your buying power enough to always be liquid when necessary. Do not spend all your money on one stock so that you’re still safe in case things get out of hand in the market
Diversify your portfolio
Connected to the last point, it’s good to spend your money on multiple other options because just shelling it out on just one or two can mean lesser chances of success. It’s a good idea to utilize different options from different industries, find some that complement or oppose each other so that you can minimize the chances of your losses to as little as possible.
A good example in the context of the pandemic would be to buy stocks from the food service industry, which is severely affected by the current situations, and complement that by buying from the medical industry, which is at an all-time-high. This way, whatever happens to either position, should the food service industry improve and the other experiences difficulties, you still balance out the outcome.
Red markets, for all their potential, can bite you back if you’re not careful enough. Where there is opportunity also lies risk, so consider these factors before making decisions with your money. Not only will you protect your portfolio, you might just improve it.
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