The economies around the world are suffering due to the disruption of the demand-supply chain and the steep increase in crude oil prices after the Russia-Ukraine wall. Though the Indian stock market has outperformed the global stock markets during these volatile conditions, its impact can still be felt as the major indices like Nifty50 and Sensex are moving in a range bound manner.
The recession period has a strong influence over the stock markets which can be clearly seen in the US and European stock exchanges like Dow Jones, NASDAQ, FTSE 100, etc. Any major events or news can crash the stock market. For example, reckless grant of high-risk loans by the US banks caused the great recession in 2008 and its impact was felt all over the world. Many stocks fell by over 50% and it wiped away the earnings accumulated by the investors.
However, recession also gives a great opportunity to beginners as they can buy quality stocks at lower prices. Therefore, if you are a beginner, open a demat account today and start investing in the stock market. It is possible to open a demat account online these days as the entire process from form-filling to document verification has been digitised by most demat service providers.
Why is recession a good time to invest?
Though recession erodes your stock market investments drastically, it always gives you an opportunity to invest. Here are a few reasons that highlight the importance of investing during a recession:
Steep decline in stock prices
Stock prices decline significantly during the recessions. While most investors sell their stocks in panic, smart investors wait patiently for the markets to rise again. Also, they invest some money in the recession as quality stocks are available at discounted prices only during a market crash.
Strong stocks gain momentum quickly
If you invest in fundamentally strong stocks during the recession, the chances of earning a higher profit are more. It is so because strong stocks tend to appreciate quickly once the recession subsides. Their prices go up quickly as compared to the weaker stocks. Large-cap companies that are increasing their revenue and profit margins consistently are considered to be ideal for investing during a stock crash. However, you can also purchase stocks of mid-cap companies that are fundamentally strong as they can unlock higher growth potential after the recession.
Recessions end quickly
Stock market experts have noticed that recessions of the past resulted in heavy losses as the market recovered very slowly. However, with the availability of stronger demand-supply chains and digital mediums, the markets tend to recover quickly after the recession. Investors don’t have to wait for a long time as their investments tend to grow swiftly once the recession subsides. Due to all these reasons, investing during a recession can prove to be a wise decision.
Investment strategies to follow in a falling stock market
You need to know the demat account meaning and its working. You need to follow these investment strategies that you can follow during a stock market crash:
Rebalance your investment portfolio
Get rid of the fundamentally weaker companies before or after a recession. It is because the stocks of these companies will witness a greater fall during the crash, and they may need years to recover fully. Therefore, it is wiser to book a loss by selling these stocks and you can also rebalance your investment portfolio by buying quality stocks in this period. In simpler words, replace the weaker stocks of your portfolio with strong stocks that can recover the losses that you have made earlier.
Keep a long-term view
It is essential to have a long-term view during the market crash. A short-term view can make you panic, and you may refrain from investing any of your money in the market.
For example, the energy or power sector has suffered the most after the Russia-Ukraine war. It is also a good time to invest in the stocks of this sector as they are available at discounted prices. However, investors who have a long-term view will only invest in those power companies that indulge in the production of renewable energy. It is so because the dependability of renewable energy will keep on increasing as the non-renewable energy sources deplete. Therefore, these stocks will be in high demand in the future.
Invest in defensive stocks
FMCG, pharmaceuticals, and some other types of stocks that are associated with the essentials tend to perform well even in the recession. Therefore, investing in such defensive stocks during a recession can be a good idea.
Diversified mutual funds
Investors who don’t have much experience of stock market trading and investing can invest in diversified mutual funds during recession. Diversified equity mutual funds of SIP (Systematic Investment Plan) help you diversify your investment without having to waste time in researching quality stocks. Also, you end up buying more stocks during the recession as the price of all the stocks fall and your average buy price becomes even more lucrative.