The world has become a different place in the last three months since the coronavirus pandemic took nations by storm. The virus first showed up in China, and every other country looked at China to see how the most populous nation of the world handled the crisis. People were worried about what erupted in the region. Sadly, the damage done was not just to human life but rather every aspect of life, financial included. The pandemic also affected the stock markets worldwide. The volatility of the market has increased since traders are afraid and unsure about how to predict economic trends. Many investors sold their shares out of sheer panic and as a result, circuit breakers across the market are now trying to prevent panic trading. The circuit was triggered four times in March, which is unheard of.
Unfortunately, the market has reached a recent unpredictability. It has large drops that trigger the rapid selling of stocks. The safeguard pauses the trading activities for at least 15 minutes to prevent the sudden surge in sales. The Securities and Exchange Commission in the US mandated that the safeguards create market-wide circuit breakers. The Commission did this to prevent a repeat of the market crash that occurred in 1987 when the price of the Dow fell by 22.6%.
Trading Stopped Four Times
On March 9, 12, and 16, S&P triggered the first market-wide circuit breaker. It was a level 1 circuit breaker, which happened when the market opened. The price of the stocks fell by 7% from the previous day close. The prices continued to drop until they reached an all-time low on the 18th. When the Securities and Exchange Commission triggers a halt on the S&P 500 stocks, trading halts on both Nasdaq and Dow. As Mark Hamrick, a Senior Economic Analyst for Bankrate said, most traders worry when they look at the stock market. They feel they are boxing against the stock prices and taking slow blows to the body just so they can stay off the mat.
How Does a Circuit Breaker Work?
According to the current guidelines issued by the Securities and Exchange Commission, there should be a 15-minute pause in trading across all stock in the US. Every stock exchange must abide by this law if the index in the S&P 500 falls by 7% before 3:25 PM. A circuit breaker ensures that traders avoid buying or selling stock on the share market since it increases the volatility of the market. The first two levels of circuit-breaks only prevent trading by 15 minutes. The third level will suspend trading for the entire day.
Rising Volatility and Failing Markets
Since there is a lot of uncertainty around the globe, both the S&P 500 and the Dow are seeing drops in prices due to the global coronavirus pandemic. Unfortunately, the volatility index in the Chicago Board of exchange has been significantly rising since the end of February and does not look like it will stop.
People must innovate and change the way they work and live as the coronavirus continues to spread across nations. The advantage of this is that people and companies will be more resilient in a world post the Coronavirus pandemic.
As global markets continue to lock some of the sharpest falls in history due to the coronavirus pandemic, investors are taking advantage by buying stocks at their lowest price. As mentioned earlier, major stock markets across the globe have been seesawing for weeks. Market participants are continuously buying and selling stocks to reduce or leverage their risk. Unfortunately, the pan-European Europe Stoxx 600 and Dow Jones Industrial Average indices went into a free fall, and the price of the latter fell by 8% and closed below 20,000. Some investors prefer to buy stocks now since they can buy at the bottom.
According to the analysis performed by AJ Bell, the volume of stocks purchased in March is three times higher than the sales. Investors flocked to the market and purchased shares of oil giants like BP and Shell. The price of both stocks has fallen dramatically over the last few weeks due to the sudden drop in the price of crude oil. The data also suggests that more than two-fifths of the investors increased their exposure in the market since March 12, 2020. That said, investment companies and other experts suggest you keep the following points in mind to prevent losing out on various opportunities.
Only Invest in What You Know
Experts say that the same fundamentals of investment will apply to all investors even during these crazy times. They suggest that investors continue to choose those companies and stocks they are familiar with while they try to maintain a diversified portfolio. It is true that one will want to invest in a stock if its price falls below 20%, but you must read the news to get a better picture of the stock. When you do this, you will be comfortable with investing in the stock. Many investors now choose to invest in various stocks since the prices are lower than they were the previous week, but you must ensure you are happy with the purchase, even if it is a short-term investment.
Experts also suggest that you monitor the announcements made about the stock market and the company. Also, look for financial results and updates and any key announcement surrounding investor relations on the business website and interviews held by key individuals in the business.
Look for Red Flags
You must find a way to differentiate between companies whose share price is too low because people sell their shares in a panic. These companies also face headwinds due to coronavirus. Experts recommend that investors only look at those companies whose stock prices dropped solely due to a drop in the market. They should follow the investment adage – ‘buy low, sell high.’ Most investment companies say that this is the best time for investors to buy stocks. There are great opportunities to consider. Investors must identify the difference between a bad stock and an undervalued stock. As mentioned earlier, investors must understand how the coronavirus crisis will impact the company in the future and how they can measure the financial stability of the company now. To do this, investors can look at the following:
- The company business model
- Any financial updates
- Their debt to equity ratio and more
These will give the investor a clear picture about the prospects of the business after the coronavirus pandemic. If the company carries a lot of debt, it may file for bankruptcy post-pandemic. There are many rumors about how the market is currently doing, and it is best to not buy a large stock without doing your research.
Experts also recommend that people should not overtrade. Yes, the prices are extremely low, and this does seem like a good time to buy large volumes, but how certain are you that the stock will give you a profit post bear market? Do not keep moving a large percentage of your stock around right now. Remember, the market will charge you a fee when you invest in stocks. Investors should always ensure that the changes they make to their investment portfolio is not only for a few days but for the long term. If investors constantly chop and change their profile, they may pay a large amount in the form of trading costs.
Play in the Present
Remember, a forward number does not mean too much. Companies will miss, and they will lose a lot of money soon. Investors should not anchor, but rather play to their strengths in the present. As an investor, you can make a few mistakes, but do not let those mistakes impair your thinking. You will make mistakes in the current environment, but do not let them influence how you perceive the market.
Use Limit Orders
Investors must remember that volume does not determine liquidity. There is a lot of volume in the market now, but very little liquidity. Therefore, investors should use limit orders to prevent any losses.
First In, First Out (FIFO)
According to experts, the beginning and end of a bear market are very different. Every bear market will work on the principle of first-in, first-out. The stocks of a company first sold in the market are the ones that investors will buy. It is for this reason an investor must think twice before he buys a share in the market.
Aggressive Companies Will Lead the Market
Which company do you think will lead the bear market into a bull market? Do you think it is going to be a company with a safe balance sheet? No, only aggressive companies will do better in this market. These companies will perform better than defensive companies, and investors should purchase shares from these companies.
If you want to increase the prices of the stock later in the bear market, you should take some risks now. Experts say that we are past that stage in the bear market where investors should do something predictable and obvious. Now that the market is in a treacherous position, investors should calculate their risks. Companies whose competitors are filing for bankruptcy are at an advantage. Therefore, investors should study the market and identify companies doing better than most. Sadly, small businesses in the food and retail industries will soon file for bankruptcy. These businesses will also do better than others when countries slowly return to a normal pattern.
Experts do not know what will happen to the stock market when the coronavirus pandemic abates. They also do not know what type of uptrend will emerge post the self-off. But they believe they know what to look for. They recommend that investors look for a follow-through day where they can look for a change in the price of the stocks of various companies like Amazon, Apple, Microsoft, Tesla and other leaders. Since there is a steep decline in the market prices, there will be a lot of fakes before investors can obtain a sustainable and true view. So, they must avoid getting suckered into investing too early in the market.
Every savvy investor knows that every follow-through day will not always lead to an upward trend. Some days will look more promising than others, but the market can head south the next day. Investors who understand the market will know that there is no uptrend that begins with a follow-through. Look for the right signals before you invest in the market.
Buy Stocks Gradually
Investors must learn to be patient before they buy stocks of various companies. Remember, people didn’t build cities in one day. You should stay patient and wait for the follow-through day or the right signal so you can test the waters. Do not jump in head first, because it will be hard to get out. Gradually enter the market to avoid putting your money at risk. This applies to all stocks in the market including promising stocks of the Zoom Video Communications. Individuals and businesses are using Zoom quite often, and this usage has increased their stock prices. Investors should understand that IPO stocks are volatile, and this is true even in a normal market.
Be patient and focus on companies you may want to invest in post bear market. Do not react to the first headline you see. Look at the market indexes to learn more about the leading stocks. Investors can also look at stock charts to discover those stocks that will do well in the market.
The world will get through this, and investors should be optimistic and imaginative. They have to believe that this will pass. The market will hit a bottom and so will the economy. Once the pandemic stops affecting people, there will be better days in the stock market. The prices will soon rise, but investors must be patient before they dive into the market.