Is it good to invest in a downward stock market?

A good way to make up losses in downward market is to buy additional share

Declining stock prices cause fear in investor’s confidence, but fluctuations in the market represent business as usual. If prices are going up, the blunt reaction might be to hurry up and buy before prices get too high. However, this often means that you're rushing to buy a stock for, say, $100 today that you could have purchased for $80 yesterday. Think reverse; if prices are falling, people often rush to get out before prices fall too far. Again, this might mean that you're selling a stock for $80 that was valued at $100 yesterday. That's no way to make money either. Ups and downs in the stock markets largely depend on supply and demand and so does the stock market. Company performances, positive or negative news about specific companies or industries, world events and political changes can significantly volatile stock market. If there are more stockholders who want to sell their stock than there are investors who are willing to buy, the price per share drops, and subsequently the stock market down.
A good way to make up losses in downward market is to buy additional shares. Averaging works best when a company's fundamentals have not worsened but its stock is not doing well due to poor market sentiment or industry specific conditions. This entails buying more if the stock falls below the purchase price so that the average holding cost comes down. The strategy of averaging down involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment has made.
It's true that this action brings down the average cost of the instrument or asset, but will it lead to great returns or just to a larger share of a losing investment? The strategy is often favoured by investors who have a long-term investment horizon and a contrarian approach to investing (style of investing that is against, or contrary, to the prevailing investment trend).
For instance, you buy 100 shares at $300 totaling $30,000. If the stock falls to $200, you lose $100 per share or 33.33 per cent of the investment. At this stage, you can do two things; wait for the stock to bounce back or invest $30,000 more at $200 and buy 150 additional shares. The latter will bring down your average holding cost to $240 ($60,000/250 shares).
This can work in both rising and falling markets. In rising markets, averaging reduces the cost of purchasing of new units, while in falling markets it reduces the loss as the average purchase price falls. However, it may not be the only best strategy while investing in a volatile market. If you're in the market primarily to build your nest egg, the best course of action almost always is to do nothing and let the long-term growth take place. If you're trying to quickly build the value of your business or your portfolio, though, seeing other people in a rush to sell a falling stock might be your signal to jump in against the current and buy.
When you buy a stock, you are purchasing a small portion of a company and profit from such a purchase comes from three different sources, firstly, cash dividends and share repurchases which represent a portion of the underlying profit that management has decided to return to the owners. Secondly, growth in the underlying business operations, often facilitated by reinvesting earnings into capital expenditures or infusing debt or equity capital. Finally, revaluation resulting in a change can make in the multiple with a willing to pay for every $1 in earnings.
Instead of being worried by volatility, be prepared. A well-defined investing plan tailored to your goals and financial situation can help you be ready for the normal ups and downs of the market, and to take advantage of opportunities as they arise. Market volatility might be a reminder for you to review your investments regularly and make sure you consider an investing strategy with exposure to different areas of the markets to help match the overall risk in your portfolio to your personality and goals. Remember, volatility is a normal part of investing.
A down market can sometimes reward your positive return than in an up market, because stocks have the potential to move higher from a lower starting point. Market forces are buying opportunities for some investors. Dramatic moves in the market may cause you to question your strategy and worry about your money.
A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will stem further losses and calm your fears, but that may not make sense in the long run.
If so, what are the pros and cons of investing in the stock market? Historically, the stock market has delivered generous returns to investors over time, but stock markets also go down, presenting investors with the possibility for both profits and loss; for risk and return.
Notable, if the company gets too undervalued, a buyer might make a bid for the company and attempt to take it over, sometimes at a price lower than your original purchase price per share. In other words, you were absolutely correct, but you got pushed out of the picture by a larger investor. If your personal balance-sheet isn’t secure, you might need to come up with money and be forced to sell at massive losses because you don’t have funds anywhere else. It is why you shouldn’t invest in the market any money that could be needed in the next few years i.e. short-term returns may not welcome in stock market investments.
Attempting to move in and out of the market can be costly. If you could avoid the bad days and invest during the good ones, it would be great the problem is, it is impossible to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a lingering effect on your portfolio. Rather than focusing on the instability, wondering whether you need to do something now or wondering what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan. A good plan can help you ride out the peaks and valleys of the market and may help you achieve your financial goals. Investors’ confidence, ensuring good governance and most importantly, long-term investments can lessen volatility in the stock market.

The writer is a Certified
Finance Specialist

 

Is it good to invest in a downward stock market?

A good way to make up losses in downward market is to buy additional share

Declining stock prices cause fear in investors confidence, but fluctuations in the market represent business as usual. If prices are going up, the blunt reaction might be to hurry up and buy before prices get too high. However, this often means that youre rushing to buy a stock for, say, $100 today that you could have purchased for $80 yesterday. Think reverse; if prices are falling, people often rush to get out before prices fall too far. Again, this might mean that youre selling a stock for $80 that was valued at $100 yesterday. Thats no way to make money either. Ups and downs in the stock markets largely depend on supply and demand and so does the stock market. Company performances, positive or negative news about specific companies or industries, world events and political changes can significantly volatile stock market. If there are more stockholders who want to sell their stock than there are investors who are willing to buy, the price per share drops, and subsequently the stock market down. A good way to make up losses in downward market is to buy additional shares. Averaging works best when a companys fundamentals have not worsened but its stock is not doing well due to poor market sentiment or industry specific conditions. This entails buying more if the stock falls below the purchase price so that the average holding cost comes down. The strategy of averaging down involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment has made. Its true that this action brings down the average cost of the instrument or asset, but will it lead to great returns or just to a larger share of a losing investment? The strategy is often favoured by investors who have a long-term investment horizon and a contrarian approach to investing (style of investing that is against, or contrary, to the prevailing investment trend). For instance, you buy 100 shares at $300 totaling $30,000. If the stock falls to $200, you lose $100 per share or 33.33 per cent of the investment. At this stage, you can do two things; wait for the stock to bounce back or invest $30,000 more at $200 and buy 150 additional shares. The latter will bring down your average holding cost to $240 ($60,000/250 shares). This can work in both rising and falling markets. In rising markets, averaging reduces the cost of purchasing of new units, while in falling markets it reduces the loss as the average purchase price falls. However, it may not be the only best strategy while investing in a volatile market. If youre in the market primarily to build your nest egg, the best course of action almost always is to do nothing and let the long-term growth take place. If youre trying to quickly build the value of your business or your portfolio, though, seeing other people in a rush to sell a falling stock might be your signal to jump in against the current and buy. When you buy a stock, you are purchasing a small portion of a company and profit from such a purchase comes from three different sources, firstly, cash dividends and share repurchases which represent a portion of the underlying profit that management has decided to return to the owners. Secondly, growth in the underlying business operations, often facilitated by reinvesting earnings into capital expenditures or infusing debt or equity capital. Finally, revaluation resulting in a change can make in the multiple with a willing to pay for every $1 in earnings. Instead of being worried by volatility, be prepared. A well-defined investing plan tailored to your goals and financial situation can help you be ready for the normal ups and downs of the market, and to take advantage of opportunities as they arise. Market volatility might be a reminder for you to review your investments regularly and make sure you consider an investing strategy with exposure to different areas of the markets to help match the overall risk in your portfolio to your personality and goals. Remember, volatility is a normal part of investing. A down market can sometimes reward your positive return than in an up market, because stocks have the potential to move higher from a lower starting point. Market forces are buying opportunities for some investors. Dramatic moves in the market may cause you to question your strategy and worry about your money. A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will stem further losses and calm your fears, but that may not make sense in the long run. If so, what are the pros and cons of investing in the stock market? Historically, the stock market has delivered generous returns to investors over time, but stock markets also go down, presenting investors with the possibility for both profits and loss; for risk and return. Notable, if the company gets too undervalued, a buyer might make a bid for the company and attempt to take it over, sometimes at a price lower than your original purchase price per share. In other words, you were absolutely correct, but you got pushed out of the picture by a larger investor. If your personal balance-sheet isnt secure, you might need to come up with money and be forced to sell at massive losses because you dont have funds anywhere else. It is why you shouldnt invest in the market any money that could be needed in the next few years i.e. short-term returns may not welcome in stock market investments. Attempting to move in and out of the market can be costly. If you could avoid the bad days and invest during the good ones, it would be great the problem is, it is impossible to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a lingering effect on your portfolio. Rather than focusing on the instability, wondering whether you need to do something now or wondering what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan. A good plan can help you ride out the peaks and valleys of the market and may help you achieve your financial goals. Investors confidence, ensuring good governance and most importantly, long-term investments can lessen volatility in the stock market. The writer is a Certified Finance Specialist