How to Trade Smarter During a Stock Market Crash

How to Trade Smarter During a Stock Market Crash

Fear of a stock market crash is never far away. And they’re brutal when they hit. Ask anyone who was heavily invested in stocks during 2000–2002, 2008 and again in 2020. Fortunately for the average investor, crashes tend to be sharp and short-lived.

We all know that there are no guarantees when it comes to investing. Excluding one- it’s very easy to lose a substantial part of your portfolio when the stock market crashes.

However, there are exceptions. Seasoned investors know that if you keep a cool head and adapt your trading strategies to the changing conditions, there can be serious money to be made when the stock market crashes.

Here are a few of the most common methods traders can utilise to take advantage if and when the market crashes.

Staying Detached Will Help You Stick to Your Strategy

Maybe not an actionable money-making technique, but a good tip regardless. It can become easy to panic when the markets crash, especially the first time you see your investments drop. Reacting with your heart and not your mind is a common error known as ‘emotional investing‘.

As challenging as it is, try your best to stay detached and stick to your long-term strategy to avoid emotional investing. Panic leads to hastiness. Hastiness leads to mistakes. Mistakes lead to loss. And moreover, panicking can cause you to overlook bearish opportunities and to miss out on future prospects when the market recovers. Simply put, staying on track proves to be the best option for investors in times of turmoil.

Find Good Stocks to Buy

A decade ago, in the wake of the sub-prime banking crisis, Warren Buffett said: “Opportunities come infrequently. A climate of fear is an investor’s best friend.”

Falling share prices do two things in particular. They reduce the overall value of an investor’s portfolio. But they also offer ways to buy great companies much more cheaply than was previously possible.

During financial uproar, the stocks of both good and bad companies tend to go down. But bad stocks tend to stay down, while good stocks always recover and get back on the growth track. For investors, the strategy is clear. If the stock of a good, profitable company decreases significantly, that presents a buying opportunity.

No two crashes are alike, but they all have one thing in common. No matter how devastating the losses were, or how long it took, the market recovered. The difference is that great investors take this opportunity to buy at bargain prices what everyone else paid premium prices for.

Market declines should be viewed for what they are: some of the best stock buying opportunities.

Go Short on Bad Stocks

One way to profit on stocks when the price is falling is called short selling (or going short). Trading stock CFDs allows you to profit from both a rising or falling market, meaning you can still make money on declining assets even in the roughest of times. Short selling is worthwhile if an investor is sure that a stock’s value will drop in the short term.

Bear markets may be tough for good stocks, but they’re brutal to bad stocks. When bad stocks go down, they can keep falling, by this giving you an opportunity to profit as they decline further.

With that said, it’s important to point out that short selling can be risky. When going long on a stock, the investor can only lose their initial investment. If an investor shorts a stock, there is virtually no limit to the amount that they could lose because the stock can continue to go up in value.

Short selling is a fairly simple concept: an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.

Short selling can be used for speculation or hedging. Speculators short sell to capitalise on a decline while hedgers go short to protect gains or minimise losses.

Play it Safer with Safe Havens

Gold is considered a safe haven asset which protects investors during crises. When the stock market goes haywire, gold often becomes the “gold” standard in the eyes of everyday investors.

The reason? During times of market uncertainty, investors tend to allocate their investments from riskier assets to havens, enabling better peace of mind in the case of a continued market downturn.

Historically, gold has done well during stock market turmoil because it doesn’t typically move in tandem with stocks. Generally speaking, the more difficult the economic situation, the more gold is expected to rise in the short-term.

Empirical analysis shows that gold was a particularly strong safe haven in the aftermath of September 11, 2001, and the Lehman bankruptcy in September 2008.

Final Words

Stock market crashes happen on a fairly regular basis. But market havoc can still present an opportunity for crafty investors to boost their portfolio through smart investments and by laying the groundwork for long-term wealth-building.

It is during these times that the truly good investors are discovered. If you have the composure to part from the herd while a landslide is in full swing, and with a little boldness, the next market crash could become your finest hour.