Table of Contents
Introduction to Stock Market:
By its very nature, the stock market is volatile. It’s like a human pulse; there are always ups and downs. Volatility in the market is inevitable and an unexpected phenomenon. It’s unexpected because even the most seasoned stock market investors and traders do not know what to expect and when!
And, it is for this reason, anyone can make money in the stock market, similarly to the case with anyone can lose money.
What exactly is a “bear market”?
A 20% drop in the stock market is termed a “bear market. It’s when people panic sell; that’s when there are very few buyers in the market. Those left are either unaware of what to do or know exactly what to do. A bear market brings a lot of hard times. All your portfolio returns turn negative. It seems as if all hope is lost and the economy may never recover fully.
From our recent highs of 18,100, the Nifty has dropped by a little over 6%, so it is easy to say that we are not anywhere near a bear market. It can also be said that a lot more trouble is on its way before we realize that we are in a market correction. Anyway, we are not here to anticipate or predict market corrections. However, we can try to analyze what makes the market correct.
So, what led to such a drop?
Top 5 Reasons for Market Correction:
Economic policies such as taxation, government budgets, the money supply, and interest rates, as well as the labor market, nations’ political and religious policies, and many other areas of government intervention into the economy directly or indirectly, will lead to a market correction.
If economic policies can make an economy stronger, the same policies can also make it weaker. And hence, we can expect the stock market to correct.
Economic policies are national issues. When it is an international one, then we have Geopolitical Concerns
With globalization, we can easily say that each and every country on the planet is as free as it is dependent. It doesn’t make sense, right? Well, with globalization, countries have opened up for trade and commerce, but they have also started consuming something from each other.
For instance, we all buy and sell goods and services to one another. And if your trade partner is having trouble with their economy, you can expect the same to have a ripple effect on your economy.
For example, in our recent video on information technology stocks, we analyzed why Indian IT stocks were falling. One of the most prominent reasons was that the Western countries were spending less on IT.
A recession is when an economy contracts two consecutive times. It’s when our GDP figures drop for 2 quarters. A widespread recession happens when there is a widespread decline in spending.
Why do people and companies & even the general public spend less? Well, it’s when the credit cost has increased. Why is borrowing cost increased? because the country’s central banks have hiked interest rates. But why did they hike interest rates? Well, because inflation was high and the only way to curtail high inflation is by raising interest rates.
Now, where does this lead us with the stock market? Remember how I said that a recession means less spending? Well, when people stop spending, companies stop making money. So, you are left with an overvalued company with dropping revenue. And, at some point, the market will notice this situation and start correcting it.
Do I really need to explain why war is bad? I mean, we are seeing what is going on with the Russia-Ukraine war, right?
With war, we have something called “imported inflation. It’s when even those countries that have nothing to do with war will face inflationary pressures imported from outside because each and every country’s trade is dependent on one another, or so it seems. For example, the current war situation has hiked crude oil and other commodity prices.
This hike will affect everyone. For instance, the cost of raw materials for companies producing anything and everything will rise. This cost will be borne by customers who’ll reduce consumption, which will impact companies’ revenue. You get the picture, right?
A natural calamity can be anything like an earthquake, tsunami, flood, drought, etc. It’s something out of our control, but the impact on the economy can be dire. Our neighbor Pakistan, for example, is experiencing its worst flood in history. Natural calamities will cause market corrections.
What Can We Do During Market Correction?
Here are the Do’s and Dont to Overcome Stock Market Worries;
Invest for the long term
Long-term Investing reduces short-term volatility. So, it is better to buy healthy companies and stay invested for the long term, say over 10 years. Here are some long-term stocks for you. CLICK HERE!
Own a Diversified Portfolio
Investing in 35 companies will reduce your market risk by over 90%. Any further diversification makes no real sense as far as risk is concerned.
So, own a well-diversified stock portfolio with at least 15 to 30 stocks from different sectors and industries. This is How you Diversify, CLICK HERE!
Proper Asset Allocation
We invest in assets other than equity because we know the stock market is volatile and, at times, unpredictable. So, through proper asset allocation, we not only diversify our investments within the market but also outside it by owning assets such as gold, silver, bonds, and real estate.
Primarily those assets with a negative correlation to the stock market. More on Asset Allocation, CLICK HERE!
Don’t Time the Market
There have been very few instances wherein professional investors were able to time the market and make big returns. But, those individuals were extremely smart and well-resourced to begin with.
We retail investors shouldn’t make any attempts to time the market because we lack the knowledge and resources to make it happen. Instead, go with the flow and invest for the long term. Why ‘No’ to Timing? CLICK HERE!
Be an Optimist
It’s one of the golden rules of investing. The true ability to become an investor and to be aware and think for the long term. It is to be optimistic about your country, society, businesses, and stakeholders.
Being an optimist is a need of the hour! No investor can ever make money in the stock market without being an optimist. Short sellers and traders make money by betting on the downside. However, true wealth is created by holding on for a long time.
What’s common in all the situations mentioned is that people start losing hope in the economy, the leadership, and the way the country is heading. Something happens, and it’s the pessimism that follows that leads to a stock market correction or even a crash.
Remember, a stock market is a tool used to sense mass public sentiment. It’s a voting machine for optimists and pessimists. One who punches hard to vote for what he wants will get it.
Right now, the pessimists are punching in their votes. Soon, the bulls will be back. Have hope and invest for the long term.
For More Information, Check this Video:
Disclaimer: All the information on this website is published in good faith and for general information purposes only.