The risks associated with stock market investment cannot be understated regardless of its mouth-watering returns, especially when compared with other investment windows.
The game of stock market investment or trading is not a win-win thing always. But let the numbers of winning trades outweigh the loss positions to keep you in profit at the end of the day. But when things go the other way and your loss trades are eating into your capital and you need to build it up gain, you must have some capital to fall back on.
In life generally, there are ups and downs and the stock market is not different from this principle. There is a market cycle comprising the ‘bear’ or ‘bull’ sessions.
The bear session is when the general prices of stocks are going down. When this persists for a period of two to three weeks, it is then said to be a bearish market.
Conversely, when stock prices are generally moving up, we have what is called a ‘bull’ session. When it lasts for two to three weeks, it is equally said to be a bullish market. During a bull market, both good and bad stocks on the exchange move up to create gains and reflect the market’s mood at that particular time.
In the same way, in a bear market, equity prices are down, forcing both the good and bad to go down due to the negative sentiments prevailing at that time.
This is also the period when investors lose money as many others are dumping their shares at such time and the sell pressure continues to push the prices of stocks down – resulting in huge losses.
To recover from such losses, the following strategies should be adopted:
1. If you are caught in the midst of a bear market, cut your loss early enough and hold cash, not stocks. This is because any loss position that is less than 20% is easier to recoup by navigating the market and taking position in other stocks that have the potential to recover quickly due to their fundamentals and market perception.
2. Target stocks with strong numbers that will rally immediately the bulls return to the market. These are stocks that went down due to the general trend in the market. They are defensive in nature and at the same time, are growth stocks.
3. Identify stocks with weak fundamentals in your portfolio that will fall and it will take a longer time to recover even when the bull comes back. Sell them to buy growing and income stocks with strong potentials to move up.
4. Do not jump out late and lose all your funds. Instead, find out if the factors that resulted in the bear market are fading away, knowing that if you have lost 50% of your capital, you need to make 100% before you can break even again. You can sell off the highly capitalised stocks in your portfolio that are not likely to rebound immediately and buy the small and medium caps with potential to rally and recover your losses.