Why do you invest in the stock market? The answer is simple…You want to make a good profit from your investment in the stock market. As you know, stock markets move up and down. When the stock markets move up, you have what is known as a bull run. When the stock markets crash, the bears take over. Just like you, everyone likes a bull market. But here’s the important part….You can’t make money in stocks, unless you have a market correction or a stock market crash. Bears are definately necessary to make money in the stock market. What is a market correction? When the stock market falls from its high by around 10%, you have a market correction.
There is a famous saying by Warren Buffett “The stock market is a device for transferring money from the impatient to the patient”. Do you have the virtue of patience? You will definately make a profit in the stock market. So how does patience help you to invest in the stock market? You need to be able to hold your cash and watch the stock market fall. This takes guts and patience. But having patience alone is only half the job done. There is something more you need, to profit from market corrections.
You need to buy quality stocks (stocks which have good fundamentals), when they have been beaten down. Many times these stocks with good fundamentals fall in a stock market correction, for no fault of theirs. Opportunity rarely knocks twice. You need to be ready to grab these good quality stocks, when they fall.
You have two types of market corrections. Stock markets are known to correct on sudden bad news or changes in policies. Is this a bad thing…. Not necessarily. When stock markets correct you can pick up good quality stocks, which seemed too expensive just before the market correction. Make a note of the fundamentally good stocks which were doing well, just before the crash. These are the stocks you need to purchase.
Identify these stocks based on strength. These stocks need to have good fundamentals. A Company having good fundamentals could have made a corporate announcement, which would have caused its shares to rally (rapidly shoot up) just before the correction. Let’s say an Indian Pharma Company acquires a Foreign Pharma firm, in the US. Investors are happy with this news, causing the shares of this Company to rally. A few days later there is a stock market correction and the shares of this Company fall down. This is the Company whose shares you need to buy after the correction.
Why is this so…. This is a stock with good quality fundamentals, whose price has fallen down just because of the market correction. Mutual funds would be targeting such stocks and would buy these stocks on correction. The price of this stock would shoot up in favorable conditions.
There is another type of correction you need to be aware of. The stock market crashes suddenly and then slides slowly. What is special about this kind of correction? After this kind of a market correction, you will notice a change in stock leadership. Let us consider the dotcom crash in the year 2000. IT Stocks which were doing very well prior to the crash, collapsed. They stayed down for many years. The space vacated by these IT Stocks was occupied by another sector. A new sector took over the stock leadership.
History repeats itself….Power and energy stocks rose rapidly in the year 2007. They crashed in the year 2008. They have never really recovered since. The stock leadership was then taken over by another sector.
What you need to note from this type of a stock market correction? The current stock leadership would change after this correction. Who would take over the stock leadership position, even the best stock markets analysts cannot say. All you can do is identify those businesses which are doing well and invest in their stocks.
So never fear market corrections. View them as stepping stones to a successful investment in the stock market.
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