Stock market crashes always seem to result in a bad day for everyone, especially those with large holdings of shares. However, as a smart investor, or even a new investor, there is no need to sweat stock market crashes like the big guys. In fact, when the stock market sees bad days, you could possibly be seeing green.
The Buy Low – Sell High Strategy
The basic tip to success for all modes of business, resale and stocks is this: Buy low, sell high. The buy low, sell high strategy is a concept most people understand, yet so few people actually follow.
Novice investors tend to buy shares of popular, multi-billion dollar companies at their prime price. They see that a company such as Google or Apple keep increasing in value, and believe that if they jump in now, they will still make money. While this can be true, it does involve a larger investment, as well as a larger risk of loss.
Not many investors have made real money by investing in higher priced stocks of established companies. Think of these investments as $5 hamburgers selling for $10. When you are hungry, you could care less about the price hike, but you are in fact buying a product worth $5 at double the price. However, to be the investor making money, you want to spend $10 on the “hamburgers” worth $20.
Stock Market Crashes, Stocks Go on Sale
When you buy stocks during a stock market crash, you are essentially getting these stocks on sale. They are the little black dress on the clearance rack for $15 that you can sell later on Ebay for $50. Buying stocks at a low price, but when they are truly worth more, is less risky and keeps a good cushion between your profit and potential loss.
Stock market crashes are also beneficial for those who practice short selling stocks. Short selling stocks may seem like a complicated idea, but it is simply when an investor is lent stock from their broker. Investopedia.com says, “The shares are sold and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares (called covering) and returning them to your broker.” If you are short selling stocks and the market price drops, then you will be able to purchase those same stocks at the lower price, making a profit.
In the end, investing in the stock market can be a tricky and confusing territory for new investors. Stick with the practice of buy low, sell high and do your research on companies that are worth buying low (some companies may have had a huge price drop on their shares, but that does not mean their share prices will ever go up). The simple buy, low sell high strategy won’t eliminate risk or loss from your stock portfolio, but it’s a general guideline that will make success in investing more likely.