The Stock Market Crash: Is It Time To Panic Or Profit? Experts Weigh In
As globalisation expands, global stock markets are becoming increasingly interconnected. This means that when a market with significant foreign investments declines, it often triggers a ripple effect across other markets worldwide.
A stock market crash occurs when share prices drop rapidly, leading to heavy selling pressure. This pressure fuels panic selling—an impulsive reaction where investors rush to offload stocks out of fear.
However, a bear market also presents opportunities to invest in undervalued assets. Instead of panicking, investors can focus on strategies to minimise losses and capitalise on potential gains.
Explore this blog for an in-depth analysis of factors driving panic selling during the crash and measures to combat them.
Why Does The Stock Market Crash?
The stock market has evolved to be an integral part of the economy, and a crash may be driven by multiple factors including:
1. Economic conditions of a country, like slow growth, monetary policy changes, inflation and excessive leverage, can adversely affect the companies and their stock prices.
Example: The 0.25% rate cut decision by the United States Federal Reserve resulted in SENSEX falling by nearly 11% in December 20241.
2. Financial bubbles are one of the most prominent reasons for a market crash.
Example: Due to the burst of the ‘dot-com’ bubble, NASDAQ massively slumped by 78% from 2000-20022.
3. Geo-political crises related to the environment, wars, supply chain disruption, and more can significantly affect the global stock markets.
Example: The escalating tension of the Israel-Iran war posed a concern about supply disruption. Eventually, in October 2024, the main indices like NIFTY 50 and SENSEX were down by 5%3.
4. Unexpected regulatory actions such as tax rate hikes or investment norms, can also adversely affect the market.
Example: After the announcement of the Budget 2024, the SENSEX fell by nearly 9% due to an increase in capital gains tax and Securities Transaction Tax (STT)4.
5. Finally, the investment behaviour of impulsive panic selling, herd behaviour, and confirmation bias can also indirectly drive negative stock market sentiment.
Example: On January 27, 2025, the launch of Deepseek AI from China on the US Apple App Store created a competitive scare, leading to a $1 trillion wipeout from the global stock market5.
Market Behaviour During Stock Market Crash
Investors constantly seek opportunities for stock market profits, leading to two distinct market behaviours during a crash:
I. When the market crashes, the absurd behaviour of investors catalyses the situations of panic selling, volatility, fear, illiquidity and lack of confidence in the market.
II. On the other hand, some investors capitalize on market volatility by identifying undervalued stocks with strong fundamentals. These investors strategically buy stocks at lower prices, anticipating a rebound during the market recovery phase.
The second type of behaviour is rare and can be a saviour during adverse market conditions. Investors should understand that reacting with the presence of mind can help them combat the crash.
Avoid Panic Selling, Plan Smartly
Humans and emotions are inseparable, making investors prone to emotional biases. In the stock market, fear and greed are the two primary emotions that drive price movements. Fear leads to panic selling during downturns, while greed fuels excessive risk-taking during bull markets. Understanding and managing these emotions is crucial for making rational investment decisions.
Investors keep increasing their investments with the greed to earn profit from the market. However, when the market crashes or experiences a short-term correction, fear takes over. This fear prompts investors to withdraw their funds, sometimes leading to panic selling and further market declines.
Investors should avoid such impulsive actions during the market crash and plan strategically, as follows:
1. Stay updated with the market movements, or check the market-related news.
2. Check for downward market indicators like a fall in the fundamentals of listed companies, heavy selling volumes and technical indicators like a low Relative Strength Indicator (RSI), high Volatility Index (VIX), and so on.
3. Analyze key market indicators to make informed investment decisions. Additionally, seek guidance from financial experts or advisors to navigate market volatility effectively.
4. Ignore the market noise and trust your research and strategy.
5. Focus on long-term investment planning.
Bear Stock Market: Playground For Strategic Investment Opportunities
Investors who profit from falling stock prices are known as bears. When bears dominate, the market experiences a steep decline. However, retail investors often struggle to find ways to capitalize on such downturns.
Here are some unique market strategies that can help investors survive during the crash:
1. Defensive Stocks For Downturn
Non-cyclical stocks remain resilient despite market fluctuations. These fundamentally strong stocks perform well regardless of economic conditions. Including them in your portfolio can help cushion losses during downturns.
2. Safe Heaven Assets During Crash
Assets such as gold and high-valued currencies have high liquidity due to their demand against scarce resources.
3. Bargain Hunting
The process of investors searching for undervalued stocks in the market is known as bargain hunting in a crash. Here, if the stocks have strong financials and are down only due to external crash conditions, investors may seek investment to benefit in the long term. It is also known as ‘Buying in the Dips’.
4. Diversify In Fixed-Income Assets
Debt instruments like bonds, debentures and money-market instruments are stock market recession-proof investments. Therefore, during a stock market crash, these assets help earn fixed-interest income.
5. Dollar-Cost Averaging
Consistency is the key. It is a simple yet effective strategy that focuses on investing a fixed amount at the regular intervals, regardless of market conditions. Eventually, the cost of investment averages out in the long term. Moreover, this strategy can be particularly powerful during the market crash.
Lessons From The Past Stock Market Crash
The past can be a great teacher. Similarly, historic market crashes can teach us valuable lessons. Here are a few:
1. Black Monday (1987): S&P fell by more than 20% due to havoc by new technology and market correction. Investors should note the significance of not following the herd mentality and assessing the market cycle6.
2. Dot Com Bubble (2000-2002): In this, the Nasdaq composite fell by more than 75% in 2 years. Bubbles teach how crucial it is to check market indicators for signs of abnormal rise in the market7.
3. Global Stock Market Crash (2008): It is one of the most devastating crashes in global history. It emphasised the need for better analysis and regulatory support8.
4. Covid-19 Crash (2020): The pandemic was natural and inevitable up to an extent, but it adversely affected the market. Therefore, having a hedge in the portfolio for uncertainties is crucial.
Conclusion
A stock market crash can impact returns and is driven by various factors. Investors should avoid impulsive decisions, focus on strong investments, and learn from past crashes. Diversify your portfolio with modern fixed-income securities like Securitised Debt Instruments (SDIs) on Grip Invest to safeguard against market downturns.
Frequently Asked Questions On Stock Market Crash And Panic Selling
1. If the stock market crashes, what happens to gold?
During the market crash, precious metals like gold are in demand due to their liquidity and scarcity. Therefore, despite the market fall, their prices keep increasing. Investors consider it to be a safe haven asset to hedge against the crash effect on their portfolio.
2. What goes up when the stock market crashes?Usually, the fall of the stock market results in a rise in the value of safe haven assets. These assets are gold, defensive stocks, sovereign bonds, and some high-value currencies like US Dollar and Swiss Franc.
3. Do you lose all your money if the stock market crashes?
During the stock market crash, the stock prices may fall miserably. It can cost all your invested money if proper planning or hedging is not done before the market crash. Investors can limit their losses by doing proper market analysis, checking market movement, hedging their position, and waiting or selling early before the crash.
4. What is an economic bubble?
It is a market situation where the price of an asset rapidly rises at a staggering pace above its actual value. This bubble of inflated prices then bursts at unsustainable peaks and the prices fall back to the actual value or dive even below it.
5. How do investors with confirmation bias react in a stock market crash?
Investors with confirmation bias will avoid the market crash indications in the market and stick to their investment no matter what. It can adversely affect the preconceived notion about market movements. However, if the investments are fundamentally sound, they may survive the crash in the long term.
References
1. India Today, accessed from: https://www.indiatoday.in/business/story/us-federal-reserve-rate-cut-decision-impact-on-sensex-nifty-indian-stock-markets-2652262-2024-12-19
2. Economic Times, accessed from: https://economictimes.indiatimes.com/news/international/global-trends/us-markets-staring-at-a-dotcom-bubble-like-burst-ruchir-sharma-paints-a-scary-picture-of-worlds-largest-economy/articleshow/116274278.cms?from=mdr
3. Livemint, accessed from: https://www.livemint.com/market/stock-market-news/stock-market-crash-israel-iran-war-to-fii-outflows-5-reasons-why-sensex-nifty-plunged-today-amid-volatility-11728044440333.html
4. Hindustan Times, accessed from: https://www.hindustantimes.com/business/stock-market-crash-securities-transaction-tax-increase-pr-oposal-plunges-sensex-by-900-points-101721717942262.html
5. Times of India, accessed from: https://timesofindia.indiatimes.com/business/international-business/the-1-trillion-shock-how-chinas-deepseek-shook-the-foundations-of-us-tech/articleshow/117629763.cms
6. CFI, Corporate Finance Institute, accessed from: https://corporatefinanceinstitute.com/resources/equities/black-monday/
7. CFI, Corporate Finance Institute, accessed from: https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/dotcom-bubble/
8. Economic Times, accessed from: https://economictimes.indiatimes.com/wealth/invest/can-financial-crisis-turn-you-into-a-better-investor-important-money-lessons-that-investors-can-learn-from-setbacks/articleshow/112942760.cms?from=mdr
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