stock market investment

Stock Market Investment Tips – Reacting to a market downturn

Everybody is happy when the stock exchange is performing well and share prices are growing gradually, but when it comes to losing, nobody likes it and people start to panic which results in further loses, Gain and lose are part of any type of investment and a seasoned investor will look at the opportunity when the market is losing. But most of the retail investors are either follower of market momentum or guided by advisors, small-time stock market investors get the news late and mostly they miss the opportunity or little late to react to the opportunity. Let’s look at how to manage your portfolio when there is a losing momentum.

If you are clueless about the risk and return of stock market and if you want to learn more about Srilankan stock market and how to invest in stock market, please follow the link below to learn more.

CLICK HERE TO LEARN MORE ABOUT STOCK MARKET AND FUNDAMENTALS

Current State of Srilankan stock market – Colombo Stock exchange

The stock market is currently facing a losing momentum and lost approx. 532 points (ASPI) compared to November 2017, overall the stock market investors currently experiencing tough time due to the political crisis and withdrawals of foreign investments. if you are a retail investor and planning of exiting the market due to the poor performance of Colombo stock exchange, stop thinking of withdrawing with loses and continue reading, this article may help you to recover your loses and make your portfolio healthy.

stock market

All Share Price Index Movement from November 2017 to November 2018

stock market

S & P 20 Index from November 2017 to November 2018

Stock market loses can be happened due to two reasons, the first reason is the bad selection of stocks and second reason could be the market downturn due to economic and political reasons, both this situation can be managed with proper research and advice.

How to overcome bad selection of stocks

Not all the listed companies of the stock market are performing or profit making stocks, the market is driven by fundamentals and sometimes driven by speculation. Sadly, most of the retail investors get caught to speculation, if your portfolio is losing due to the selection of bad stocks do not exit the market, instead, do a research to find the fundamentally strong stocks, sell of the losing bad stocks and reinvest on fundamentally strong stocks, irrespective of market fluctuations, fundamentally strong stock are proven to give returns in long term.

Eg: You bought company X stocks, which is a bad performing company and continuously losing value, your 100,000 LKR portfolio became 90,000 LKR within short period, sell the stocks for 90,000 LKR and buy a fundamentally strong stock for that value, over the time fundamentally strong stocks will grow gradually and you may be able to recover your investment with return.

Your stock selection is strong, but the market downturn due to economic and political reasons

Again, panic selling will worsen the situation and use the tactics of veteran investors to overcome this situation.

Put on hold – as an investor, you may have to wait patiently sometimes, reacting to the market downturn is bit tricky and stay put as long as your stock selection is fundamentally strong, people who had patients when market is hitting low reaped more rewards when market is back to positive momentum, Warren buffet used to buy and hold fundamentally strong companies.

Average your stock price – averaging is a very good method of stock market investments, reducing your per stock cost is a good move and you will quickly reach the breakeven point and make profits with your investments.

Eg: you bought 10,000 stocks of company X for 100,000 LKR, the current price of the stock is Rs.9, provided that the company X is a fundamentally strong company, buy another set of 10,000 stocks which will be 90,000 LKR, now you have 20,000 stocks of company X where your investment is 190,000 LKR.

1st 10000 stocks                = 10 RS*10,000=100,000 LKR

2nd 10000 stocks               = 09 RS *10,000=90,000 LKR

Average price of a stock is = 190,000 LKR /20000 = 9.5 LKR

When the market turns positive, you can quickly recover your capital and anything more than the value of 190,000 LKR is your profits.

Look for strategic entry points – Stock market is mostly driven by strong fundamentals of the listed companies and economic and political stability of the country, a sharp investor shouldn’t buy or sell every day, the investor should look for entry points and exit points, you can enter the market when market drops where you can buy a fundamentally strong stock for a lower price, look for a perfect time and exit when market booms due to a real fundamentally strong reason. In the long run, Colombo stock exchange is on a growing momentum and look for perfect entry and exit points to trade stocks effectively.

Conclusion

Gain and loss is a part of an investor’s journey. Before reacting to a loss it is important for an investors to understand the situation and fundamentals behind the market condition, do not fall for the speculative signals which trigger the panic buying and selling, stock market investment can make huge differences compared to the conventional investment methods available in the market, however, understanding how the stock market investment operates and understanding the core fundamentals of the market are imperative for a successful investor.

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