Make money in stock market crash

How to Use Stock Market Crash to Make Money?

The Indian stock market crashed by more than 10% which creates fear of uncertainty among the investors. Lots of midcap and small-cap stocks are already down by 50% from their recent highs.

Russia Ukraine war was not only a bad dream for Ukraine but it horrified Indian investors too. So, I bring this blog to help you understand the market crash and how you can make money in a stock market crash.

1. What is a stock market crash?

When the stock market benchmark like NSE or S&P 500 falls by more than 10% in a day or a week then it is called a market crash. A market crash is represented by a huge loss of money and extreme negativity in the market. Generally, it takes some time to recover from crashes.

Are the Stock market Crash and Bear markets the same?

When the market falls suddenly by more than 10% in one or series of trading sessions then it is called a crash. In contrast, the Bear market is a long period of underperformance of the majority of stocks.

 If the market has fallen by more than 20% then such an event is called a bear market. Bear markets usually last longer than Crash.

2. Reasons for a stock market crash

a. Stock market bubble

The biggest reason for a stock market crash is the bubble created in the market. As a beginner, you must be curious about what is the market bubble?

It is the situation when everybody is highly optimistic about a certain sector and stocks hence, such stocks get premium valuations. When the valuations reach to unsustained level then the market crashes.

b. Dotcom bubble

In the 90s any company ending with dot com used to get premium valuations.  After the huge rally in tech stock, the dot com bubble finally burst in the year 2000. Whenever the bubble gets bigger then it has to burst at some point.

Most tech companies went bankrupt due to a lack of cash. As an investor one should make sure to invest in cash-rich and good earnings growth companies.

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Our collection of best finance books for beginners.

c. Economic crisis

Another reason for the stock market crash is the economic crisis. Rising inflation, Weak government policies, are some reasons for the economic crisis.

When the economic condition of the country suffers then FIIs(Foreign Institutional Investors) tend to pull out the money from the emerging markets(India, China) to developed ones(USA). While retail investors choose to invest their money in safer options like gold, bond, etc.

3. Can a stock market crash be predicted?

Some people say they can predict the stock market crash. In the long term, it is easy to predict the stock market. But answering the questions like where the stock market is heading in the next month or two is not everyone’s cup of tea.

Here is the tip for predicting stock market crashes, the biggest crashes happen when nobody is predicting them. So, don’t waste your time guessing the next crash even those who brag that they are good at it, fail the most of the time.

4. History of the stock market crash in India

history of stock market crash

a. The Harshad Mehta scam 1992

Finally, In the year 1992 the scam came out in the media, and the BSE index fell by 72% which was the highest fall in the history of BSE.

Everybody knows Harshad Mehta after the Scam 1992 web series.  At his time, he took the advantage of the loopholes in the banking system and made a scam of Rs 5000cr by using fake bank receipts.

It was one of the biggest scams India had ever witnessed. Harshad Mehta used to invest heavily in stocks like Acc and manipulate its share price. He pumped the share price of Acc from Rs 200 to Rs 9000.

b. Housing finance crash 2008

It was caused by the bubble created in the housing market. In 2008 when the housing finance bubble burst then it not only hurt the markets of America but also lead to a crash in the Indian stock market.

c. Covid 19 crash

When the Covid 19 started spreading all over the world in a matter of days every one of us was locked inside of our own house. The market reacted to rising covid cases and the stock market fell by 50%. Everyone was fearful about the future of businesses. But as always market bounce back and this time it recovers faster than ever.  If someone invested in the market crash, anyone would have made his money double in a year.          

5. Why stock market crash is the best time to invest?

 Historically market crash is followed by a big rally. At the time of the crash, every stock is available at cheap valuations. It allows investors to invest in good stocks and exit from bad ones.

6. How to invest in a market fall?

a. Buy low, sell high

Market fall is stressful, who would like to see the portfolio in red. But the silver lining is market crash allows buying stocks at low prices. There is nothing much to lose in a market crash so, one should not forget to take advantage of once in a blue moon opportunities.

b. Invest in long term

If you are investing for the long term then there is no need to worry as the stock market has always bounced back and even breaks its previous highs. In the long run, the prospects of India are bright so, one can invest in India without any hesitation.

c. Buy strength, sell weakness

Well-known investor Shankar Sharma has said in his recent interview that “In the falling market buy the strong stocks and exit from the poor fundamental stock. As strong stock will bounce back way faster when market comebacks”. Don’t buy a stock just because it has fallen a lot.

7. Best investments during the stock market crash?

Having a diversified portfolio is the best way to tackle the market crash. One can invest in different asset classes like gold and government bonds which are safer options.

Global markets also have fallen a lot. In America FAANG stocks made investors disappoint as they are down more than 30 to 50%. Right now, India is probably the best place to invest as it is the most stable market in the world.

Conclusion:

For some people, a market crash is a disaster while for some it is the opportunity to buy gold at the price of copper. In which group of people, you come, don’t forget to mention it in the comment section.

FAQ’s

Will the stock market crash again in 2022?

Bull and bear markets are the part and parcel of a stock market. Whenever the market rises exceptionally well then there is always a risk of a market crash or correction. Recently we see a crash of 10% in the stock market. There may be more pain in the market as FED will keep hiking the interest rates.

Why the stock market is falling?

There are many reasons behind the fall of the stock market. One such is that FII is pulling out money from the country.

Should you average out or book the losses in stocks?

 Average out the stock only if you are invested in the fundamentally strong stock. Otherwise, there is no point in watering the weed. If the company’s fundamentals are deteriorating then there is no shame in booking losses.

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