What To Do During Market Highs and Lows
Financial markets are highly volatile, making stock trading a risky investment. It’s easy to garner huge returns in a single day only to wake up to devastating losses in the following day. But for the brave investor, both upturn and downturn trends present an opportunity to maximize returns.
Essentially, the secret to successful trading lies in taking emotions out of the equation. While this may sound easy, it is pretty hard to ignore the craze that comes with market trends. Most people will panic-sell immediately securities dip and buy when there is an upward trend. The unfortunate bit is that both action plans may work against you. So, how do you maintain your calm during market upturns and downturns? Here is what to do.
The Upturns
When there is an upturn it is usually referred to as a bull market. At this time, the security prices are rising or expected to rise to provide favorable conditions to invest. To maximize returns consider the following approach:
Consider the Stock Class
Even though most securities prices are on the rise during a bull market, some rise at an aggressive rate than others. Usually, the small-cap stocks exhibit phenomenal growth during a bull market meaning more profits. On the other hand, the large-cap stocks are often in a plateau state with a less significant increase in price.
As much as small-cap stocks sound enticing, keep in mind that they are highly risky. Often these stocks are small emerging companies whose growth is on speculation. The large-cap stocks are well-established companies and are less likely to go under.
Your risk tolerance should help you determine where to invest your money. If you are looking for a safer investment, then the large-cap stocks are your best bet. Small-cap stocks are ideal for aggressive investors with high risk tolerance.
Choose the Appropriate Industry
Choosing the appropriate market cuts across both bears and bulls market. Some stocks will continue to grow even after a bull run is over and offer good returns in a bear market. The cyclical stocks such as housing, automobile, and technology are known to grow exponentially in both markets. So, including them in your portfolio may multiply your returns. Once the downturn market begins, the utility industries, health, and energy tend to weather the storm.
Diversify Your Portfolio
More often than not, when the bull is reigning, other asset classes are also at their best. These assets include bonds and mutual funds which may further increase your returns when added in your portfolio. Besides, these non-stock investments are a lot less risky compared to securities.
The Downturns
The downturn or bear market does not necessarily signify bad omen as most investors view it. Here is how to stay safe as the bear mauls the market:
Look for Buying Opportunities
Although it sounds counter-intuitive, buying stocks when the prices are low can be profitable. But this will require extensive research of the stocks to find the undervalued ones. In most cases, such stocks promise high returns once the market recovers. When buying stocks during a bear market, it is wise to take advantage of dollar-cost averaging. This way you will spend less money and get more shares to compare to lump-sum purchasing.
Focus on Dividends
The price of a stock may dip but this doesn’t mean the company is in financial turmoil. The downturn trend may be due to panic-selling from investors, yet the company is still strong financially. The stronger the financial stability the higher the dividends. As such, be sure to give a deeper look into a company’s financial reports to assess its ability to pay dividends during a bear market.
Short Positions
Short selling is profiting from a stock downturn trend. This method is highly speculative which makes it quite risky if the stock you are shorting increases in value. However, if the share price drops as anticipated, you buy those shares at a lower price and make a profit on the price difference. For instance, if you short YZ stock at $45 per share and the stock falls to $30. You will buy back the shares at $30 to cover the short position, netting a $15 profit.
Summary
It requires a change of perspective to see the bright side of a downturn market. Similarly, you need deeper insight to maximize returns when the stock prices are on the rise. For these reasons, be sure to use the tips above in both market trends for profitable trading.
