A stock market crash can be a buying opportunity for investors who are patient and have a long-term outlook. During a stock market crash, stock prices fall dramatically, often giving investors a chance to buy stocks at a discount. However, it is important to remember that not all stocks will be affected equally by a stock market crash.
While some stocks may rebound quickly, others may take years to recover.
For investors looking to profit from a stock market crash, it is important to do your research and only invest in companies you believe will weather the storm. Additionally, it is important to remember that a stock market crash is not a reason to panic. Instead, it is an opportunity for investors willing to take on some risk to potentially make a lot of money.
Use dollar-cost averaging (DCA)
A stock market crash is a sudden and significant decrease in the stock market value of many stocks. Crashes usually happen when the economy is bad and people are worried about their investments.
DCA stands for Dollar Cost Averaging. This is a way of investing money gradually, over time, instead of all at once. This is a good way to invest money when worrying about a stock market crash. Investing gradually means you will not lose as much money if the stock market crashes.
How to use dollar-cost averaging
Here is an example of how DCA works. Let’s say you have $1,000 to invest. You could invest all of the money at once, or you could invest $100 per month for ten months. If the stock market crashes after you have invested $100 per month for ten months, you will have lost less money than if you had invested all the money at once.
DCA is a good way to reduce risk when investing in the stock market. If you are worried about a stock market crash, consider using DCA to reduce risk.
How not being invested in the stock market can be profitable
Surely, if you leave your money on the sidelines and do not invest in stocks all the time, how can you profit? Using the cash position to your advantage is a simple yet incredibly powerful strategy to make money from a downturn.
There are some very important questions you need to ask yourself.
- Are you always in the market? By this, we mean, are you always invested in stocks?
- Do you think you will maximize your profit if you are always invested?
- Are you scared of missing some profit if you do not stay in the trade?
The independent investor’s advantage is cash.
One key advantage of being an independent investor is that you can pull your money out of stocks and move into cash whenever you want, and you do not have to answer to anyone but yourself. This is an important advantage over large institutions, which have to leave the bulk of their cash invested in the market because of their manifesto with their investors. Sometimes, having your entire portfolio invested in stocks does not make sense.
Your default position should be cash.
From this position, you buy stocks and hopefully reap the benefits. When things start looking bleak – sell. Today, we have a lot of unknowns in the global economy. Are you going to stay in the market and hope for the best?
There is no shame in being in cash.
Most experienced investors trading their accounts use this to their advantage. Knowing everything about technical and fundamental analysis will not help if you refuse to move to cash when the market enters a serious bear phase. Money management and the preservation of your capital are critical. If you risk too much and lose too much, you will not have enough money to invest when the going gets good.
The more you lose in a downturn, the more you must make on the upturn to break even.
2 Examples of Stock Market Crash Strategies
Example 1 -The Strategy of 80% of the people who fail to beat the market.
Stock A – you BUY 100 shares @ $10 per share = $1,000 investment
Stock A – Drops to $5 per share (50% loss) = your investment is worth now $500
Stock A – Moves back to $10 per share.
This stock will need to move back to $10 to get your investment back, meaning you need to make a 100% profit to break even.
Example 2- The Strategy of the 20% of people who beat the market.
Stock A – Bought 100 shares @ $10 per share = $1,000 investment
Stock A – Drops to $8.50 per share = you SELL and take the loss of 15% – investment value now $850 – you stay in cash.
Stock A – Drops to $5 – you BUY 170 shares @ $5 – invest your $850 back into the stock – investment value $850
Stock A – Increases to $10 – you SELL 170 shares @ $10 = $1700. This is a 70% Profit.
Now you know what to do.
In example 1, you had the stress of being in a losing trade for a long time and making no profit at the end.
In example 2, you took your losses on the chin early. However, you then waited patiently for the right time to get back in, made up for your early loss, and made a significant profit.
DO NOT SIT AND HOPE – TAKE ACTION TO PRESERVE YOUR CAPITAL AND WAIT FOR BETTER DAYS.