Falling Stock Prices – Cause for Concern?

falling stock prices

The investor’s chief problem—and even his worst enemy—is likely to be himself. – Benjamin Graham.

As human beings, there is an immediate fight-or-flight reaction built into our physiological systems, in reaction to any stressful or life threatening situations that may arise. Same goes for investors as well. When we talk of stressful situations, changes in the stock prices in the markets is one which may seriously cause an investor to just pull out all stops and completely lose control of their money. It sounds scary and for some people, when they see the market reacting negatively to current situations, it immediately raises a panic flag in their mind and they may think that withdrawing money now will make them help cut their losses and protect themselves from further harm. 

Well we’re here to tell you that you could not be further away from harm if you tried. Investing is very acutely related to an investor’s psychology. The markets are after all, a reflection of how the investor behaves – if the investor is optimistic, then you will see an overall rise in stock prices and the index will also react positively, but bring in just a little amount of doubt and negativity, and the investors withdraw their money and stock prices start falling. 

When should you be concerned? It completely depends on your mind frame, your purpose and how long you’re in it for! 

Let me ask you, are you a part of the top management of the company?

If not, then you have little to worry about if the stock price of the particular company is falling. Had you been so, you should definitely investigate why investor’s perception about your shares is not good in the market. You might need to check if your competitors’ share prices are also falling, and if the industry is generally showing low profitability or is it just your company?

When you don’t own the company, or work in it where your salary includes bonuses like stock compensations, then minute changes in prices really depends on whether you are investing for the short or long term.

The short term and long term in investing

You could say that any investment period which is less than a year or includes practises like intraday trading, buying stocks today and selling them tomorrow classify as short term trading. Generally, people who do this are into trading full time and do it as a profession. For most of us however, investing is a way to build your wealth and assets over time – so, we should generally invest for the longer term. 

A long time period ensures one to fully utilise the returns that a stock might offer, after all Rome was not built in a day! The key to understanding short term and long term is that markets function in cyclical patterns – there is a period of recession, and then recovery and boom, and then again it falls – and this goes on. If we look at the performance of the Nifty 50 index over time – you should notice that there has always been an upward trend in the markets, no matter the lows in between.

nifty 50

nifty 50 drops

The fall in nifty during the present coronavirus pandemic has been the fastest in recent years, but it also picked back up later on with improvement in the economy. If an investor only looks at the minute falls and crashes in the stock prices during a short period of time then, they may experience further losses, because the loss in value of stock prices is unrealised as of that point – it only gets realised after you’ve sold it off.

Let’s not panic!

So no matter how grim the situation looks, you should always fall back on what you know and whether the company’s stocks you have invested in are strong fundamentally. If you resort to panic selling then you would lose out on returns that can be achieved over the longer term. 

The price of shares of different companies moves up and down constantly in reaction to day-to-day market news, profits, change in management, important announcements etc. Look at Bajaj Finance for example – 

You can see a huge drop in price here, but to an informed mind, this price drop was due to the stock split of shares in 2016. Bajaj Finance announced a split in the face value of shares from Rs. 10 to Rs.2, but the market capitalisation had not been affected because each investor just owned 5 shares at the price of Rs 2, rather than 1 share at Rs.10. General news and media makes it actually sound worse than it is.

We look at our favourite investor – Warren Buffet for advice, and he has also said, “You can’t predict the market by reading the daily newspaper.” Look at it from another point of view – If you are looking to buy a car, would you prefer high or low prices? Lower of course. Similarly, if you are young and looking to buy cheap stocks, this is your chance.

The question you need to ask yourself is – Can you stomach the risk?

The market is volatile, we all know that and investing in the stock market is risky. But as an investor, it is important to realise what your risk tolerance level is like. How much loss can you stomach before you start resorting to panic selling. Having practised on stock simulators or virtual trading platforms can give you a clear idea of your risk profile. However generally, people say that if you are young, then 80% of your investments should be in equity and the rest 20% in debt. 


 

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