How to take advantage in a stock market crash
Last Updated: 27/03/2021
The average retail traders in the financial market are always concerned about making huge profits in the shortest time possible. However, those with extensive experience in stock market trading are always trying to diversify their risk factors to survive major stock markets crashes. A drastic fall in the price of a security is generally referred to as a stock market crash. Those who have opened positions face significant losses, and at times they might even blow their trading account. What if we told you that you can still make money when the markets are crashing? Would you believe that? The simple answer is YES. After reading this article, you will have the opportunity to profit and take advantage of a stock crash.
Always buy shares of the reputed companies during a market crash
The newbie stock traders are always trying to buy stocks with exponential growth. They often just ignore the brand value and long-term sustainability. On the contrary, the professional stock traders are always trying to minimize their risk exposure by buying shares of the reputed companies like Apple, Samsung, and Microsoft, etc. Chances are incredibly high that you will be able to close your trade at the breakeven point by holding on to your position even though the market price might drop by 75%.
But how do you make a profit? The simple answer is adding a position to your stock when the market value drops by 75%. But this strategy requires advanced knowledge in risk management. The first time you buy the stock makes sure you are not risking more than 2% of your account balance. Once the price drops by 75%, opens a new position with 5-10% risk (risk tolerance level greatly varies from traders to traders).Once the market recovers, close both trades and you can easily make a significant profit from such major crash. This trading strategy is often known as advanced grid trading strategy in the professional stock trading community.
Dollar cost averaging technique
This technique is widely popular in the professional stock trading network. Dollar cost averaging strategy involves buying and selling the same share at a different price. Let’s say, you have encountered a stock market crash and the price has reached a major support level. In such case, you can sell some shares and wait for a better price to execute long. But this process is extremely complex and requires precise knowledge on support and resistance level trading. But once you master this technique, you can easily make a decent profit regardless of the market condition. To be precise, the market crash will create a unique opportunity to make a quick profit.
Learn to reinvest properly
At times the face value of a certain share might fall to a great extent without any prior notice. In such case, you have nothing to do except reinvest. Though this might sound like a suicide mission, the professional stock traders have managed to make a decent profit by using this technique. Sounds a little bit confusing? Let’s make it clear. Let’s say you have purchased Apple stock, and the market has crashed, and the price has gone down below 70%.In such a case, there is no point of closing your open orders. To be clear, this should be a perfect buying place since tons of people will be buying the shares at such a low price. Since you are already down by 70%, you can’t buy any new shares. In such a case, you need to reinvest some money so that you can buy shares at a lower price. But make sure you are not trading the market with the money that you can’t afford to lose. Stock trading is nothing more but understanding the risk factors and placing trades with managed risk.
Cash dividends and share repurchase
Cash dividends and share repurchase policy are closely related. However, the novice stock traders never find the correlation between the two. When you see the price of a certain asset falling, you can cash out from your open position at a lower price since you know the market is most likely to fall. You need to wait in the sideline until the share value reaches a significant low so that you can repurchase the share.
Some of you might think cash dividends is only applicable when the stock price is going significantly higher since the companies’ payout from their profit margin. But in reality, you can still cut down the losing trades at a better price by using cash dividends method. And use the cash to repurchase the stock at a better price or create an alternative cash generating source while the stock market is in a storm. Always try to think outside of the box when the stock market crashes.
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