A stock market crash is a large and generally rapid decline in stock market prices. Here, a market index may drop severely in a day, or a few days, of trading. The cause of the crash can be the overinflated economy, any kind of social-environmental disaster, bad news, etc. And generally, when a recession comes, it covers the global market. In 2020, the global market crashed due to the fear of a disease called Corona Virus. In this context, I will show you the technique to survive a stock market crash.
General FAQ
When shareholders dump their stocks for any uncertain events like natural calamities, Causes include an overinflated economy, disasters, and other bad news events.
If a market double-digit percentage drop occurs within a couple of months, you can assume the market crash is going to happen soon. From January to March middle of 2020, the market correction is about 38%. So we can clearly assume that it is going to be a huge crash in the year 2020 due to Coronavirus.
The last stock market crash in India was in 2008. In that year market correction was more than 63%. The recession came due to many unwanted global economic scenarios. The market crash took 14 months’ time to recover.
Market Crashes can lead to a deep bear market. If the market falls 10% beyond a correction for a total fall of 20% or more. It generally lasts for 14 to 18 months.
1) At the beginning of the recession, just book most of the profit from the market.
2) Prepared an emergency fund.
3) Wait for the correct time, then invest during the bottom of the market crash.
4) Stay updated with the news on global and regional economics.
How do you Hedge against the Stock Market Crash?
Here are a few tricks by which you can easily hedge your funds against the stock market crash.
- Do not invest all of your capital into the equity market. Put some of them into secured ones. Though secure investment options, the returns are low, still, a part of your capital should be invested in the secured option.
- Try to invest in the commodity market. Gold hedging is quite popular against the stock market crash.
- Hedging through Call and Put options in the derivative market is also well known. You can hedge your stocks with futures options.
- Short selling or a short position can give you huge profits during a market crash.
Historical Scenario of the Stock Market Crash in India
Now let us check some of the crashes of the Indian stock market.
2008
In the year 2008, India had one of the largest erosions in investors’ wealth. In that year, in January, Monday BSE Sensex fell by 1408 points. The day is known as “Black Monday”. The crash happened due to global investment climates, selling of FII, volatility in commodity markets, and other worse economic events. On the next day, Sensex again fall and the fall continued till November 2008. The recovery cycle took almost 14 months.
Now, have a look at the above picture. There the Fibonacci levels clearly show the market falls more than 62% within a year. The fall didn’t come so quickly, it happens for months. First, the price breaks the support of 38.2%, then 50% and lastly 61.8%.
2020
Here, let’s come to the most important part of this content. Now, we are going to discuss the current market crash scenario of 2020. Back then in 2008, a huge fall happened due to some unwanted economic affairs. But this year, the trigger point is a disease. This year’s market dropped so quickly compares to 2008. From January to March the market falls by almost 39%. First, have a look at the PE ratio.
The above graph represents Sensex PE (price to earnings). As we can see that this year Sensex PE touched the lowest 10 years average value which is 19.78.
As of (16th March 2020) this is the scenario. You can clearly see the market is currently near a 38% correction level. Though it has not reached that level yet, still the price fall speed is faster compared to 2008. I have clearly marked the three support zone in the picture. The first support is at 38.2%. After breaking the 1st support level, the price will go towards the 50% level, and then the last S3 zone is 61.8%.
There is a slight chance that the market will bounce back to test the last high. But if it fails to cross the high, the price will again go down. The last low Nifty made was at the 85oo level. It will take some time to break the low, once it will be broken the price will go down further.
How to Survive the Stock Market Crash of 2020?
- Currently, the market is in an indecision stage, if you think that the market falls enough and now you can invest your money, then I suggest it is still not the correct time to invest.
- As the market scenario mostly depends on the social environment, here we have no control of our own.
- It is been expected to see a further down move. A market crash generally takes 14 to 18 months to recover.
- It is advisable to invest your money at the bottom and book the rest of your profit now.
- Try to put money in some secured returnable investments.
Update of the 2020 Crash
When we first time wrote the post it was in 2020 itself. At that time Nifty made a low of 8500 level. But in 2020 later in March only it made another panic bottom to test the 7511.10 mark. Any investors investing in the next low as suggested by us made good gains as markets later climbed to the all-time highs.
Conclusion
Going up and down is the nature of the market. You need to stay cautious while investing. Think about how much money you can make if you invest at the right bottom of the market. Do not take quick decisions based on news and others’ view. Try to analyze the market on your own.
