25 Jun, 2014

How steep fall in market may be good for investors?

Investors like seeing market moving upwards and afraid of steep fall. But both boom & correction are part of market cycles. One should just not see the only positive or negative sides but both of it in each case. Boom may be good for existing investors as stock prices rise fast but on the same side it may not be good for new investors as they have to buy stocks at overpriced values and thus risk for investors rises. Correction may not be good for existing investors as the value of investments goes down but it is good for new investors as they could enter at underpriced values. But even after that we see, new investors enter during boom & get trapped on higher values. Whereas they don’t like to invest when market falls as they see market a risky investment at that time; but without being aware that they could buy stocks at underpriced values under such situations.

market-crash

Correction in market is must to maintain balance as it helps to bring prices back to normal and forces sick companies out of market for the welfare of investors. Only companies with good businesses and good management can survive even in unfavorable conditions and thus can do wonders during good times. So the economy slowdown which causes market crash helps new investors to find out good businesses at reasonable prices and thus increases the chances of higher returns.

When fall occurs in markets then existing investors do very less fresh buying which results the stocks to trade at underpriced values. So whenever market recovers after correction then it moves at much faster pace & provide high returns on investments along with lower risk associated with them.

If new investor due to fear of markets going further down does not want to invest in lump-sum in markets then he should invest in systematic investment plan under which he will able to invest same amount at regular intervals of time. Systematic investment plan helps in rupee cost averaging by providing higher units when price goes down & vice-versa. So if market has still not bottomed-out at the time of investment, SIP helps in further entering in market at lower prices.

So new investors should understand market cycles and should try to take benefits out of it. They should not be afraid to invest whenever market falls rather they should embrace the opportunity. Also existing investors should not sell their stakes due to being afraid of fall but should show some patience because markets favor those who can remain patient even in adverse situations. Also they should try to invest fresh to do some averaging which will increase returns as trend will reverse.

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