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Knowledge Crunch

Stocks are correcting, now what...

Wednesday, May 26, 2021 11:40 AM GMT

Recently we saw a minor correction for US stocks.
For some, this is indeed just a minor and completely normal market move.
Though for others, it is the beginning of something much bigger, a “Bear market”.

Assuming you are a generally new investor, or have been experiencing the stock market only the last year, these times might be quite challenging and could potentially result in losses if not taken seriously.
It is for this reason, we created a list of tips that might be helpful and provide you with valuable insights in order to survive this “battle” and resume stronger and wiser.

The “Stairs up, Elevator Down” spectrum.
Historically, stocks have been progressing slowly upwards and correcting sharply.
This has been heavily related to the basic principle that in a bullish market, investors are willing to maintain their positions, or even increase them, while if the market tumbles investors get easily worried and dump their investments fast. This results in a most certain fast and violent drop.
So if you are worried that we are in a bear market or start seeing the warning signs of increased volatility, maintain your liquidity and sit on the sidelines for as long as you feel comfortable.
VIX, is a product that might be proven useful for assessing the volatility in the market.

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Shorting is available through CFDs and derivatives.
Now a lot of investors might not be familiar with this, but ‘shorting’ (betting against a stock), is possible and legal throughout a host of products that are called derivatives. One of the most comfortable derivatives for stocks is the CFD(Contract For Difference).
However, you need to be careful, derivatives are most of the time highly leveraged products and might result in a big loss if not used correctly.

Buy and hold strategies could be employed but buying the dip is risky.
Pretty straightforward. You could “buy the dip”, but end up “catching a falling knife”.
Buying stocks when they fall could be a correct concept, but it should be performed when markets are not tanking heavily.
This could lead to an average holding price which might require a lot of months or even years to exceed.

Avoid tech bubbles.
The “Dot Com Bubble” taught us a lot of things. One of the most important ones was that the price of a stock does not always indicate the correct intrinsic value of a company. Stocks can be overvalued, especially in the Biotech sector where a new technology or product can attract millions and even billions of potential investments.

Invest in value, companies with big numbers in production.
When things are a bit “shaky”, it is time to focus on the old school way of investing and allocating our capital. This would probably translate as the “Warren Buffet method” and rightfully so. Investing in companies that you understand the concept, are massive and have a big share in the global market’s production then chances are you won’t be disappointed. This is not only a strategy to produce an attractive return of investment but rather to lose less than other people. Companies with immense market cap (that is being justified by fundamentals) have less volatility and rarely perform spike moves.

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The indices should be our guide. Revise your decision based on the lead index performance.
Now this is key, and it is actually so important that we are going to devote a whole article on how to use the Indices in our favour and turn our portfolio from a random choosing experience to a fully informed statistical “bet”. Direction is highly vital. 

All in a nutshell, we understand that being an investor in this hectic environment is a demanding and challenging task, but it is also an amazing opportunity to learn and form a long-term strategic way of approaching the stock market.
ZuluTrade provides you with the products to do so and will continue to support you in the knowledge base journey.
Stay tuned, more to come on stocks!!

 

Disclaimer

The views expressed do not constitute investment or any other advice /recommendation /suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in the report do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade. Every metric and the statistical number is a result of a past performance, which does not constitute a promise or a certainty for a future one.

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