F(N)AQ: Why Investors Suffer Losses During Market Crash?

The market is bleeding red. Equity investors have piled up losses. Aren't these two the most common headlines we come across whenever the market crashes?

Certainly yes. After all, it's a sight we feel dreadful about, right? But have you ever wondered the reason behind the latter headline? It's not that a market crash is synonymous with losses. What leads to losses is the act of blindly following the herd mentality and taking impulsive actions when gripped with fear.

That's why a lot of investors, in fact, do the opposite, by acting wisely and turning market crashes into an opportunity!

Now the question arises, why do investors suffer losses then? That's exactly what we try to unfold for you. Read on as we answer some not so frequently asked questions surrounding market crashes and losses.

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What is a stock market crash?

A stock market crash is a rapid, abrupt and/or often unanticipated drop in stock prices, which may trigger a prolonged bear market or signal economic trouble ahead. Reasons behind a stock market crash can be one or multiple, including the economic crisis, catastrophic events like a natural disaster or the pandemic, or even the collapse of a long-term speculative bubble.

What to do during a market crash? How to avoid incurring losses?

Firstly, do not panic. No matter whatever hearsays or biased opinions you are being bombarded with, staying calm is the first hurdle you need to cross amidst extreme market conditions like a crash. While it's natural to feel fearful on seeing your equity portfolio in red, it's not at all okay to blindly follow the crowd. After all, you will fall into the same hole as them in that case!

So, its all about resisting the obvious urge to sell your equity holdings, whether its stock or equity mutual funds. Simply put, you will incur losses on your investments when you sell/redeem them when they are bleeding red, like in case of market crash. As prices of stocks and NAVs of equity mutual funds come crashing down in such scenarios, it does not make sense to panic and just sell off everything and sit on a pile of losses.

When gripped with the fear of a further fall in market during correction or crash, always remember that history has been a witness that the market recovers from crashes, the most recent example being the stock market crash of March 2020 in India, wherein NIFTY 50 had crashed to almost the 7,500 mark. But this year, as we have seen, the market has bounced back strongly, and has been soaring high around the 17,000-18,000 mark.

Also Read: 3 Impulsive Steps To Avoid When The Market Is Bleeding Red

When do you incur loss then?

The only unavoidable case when you might have to incur losses is when you are in dire need of money and need to sell/redeem the equity holdings even during a market crash. Otherwise, in most other scenarios, it's not just advisable to act with prudence and practicality by not redeeming/selling your investments in panic, but in fact you can turn market corrections and crashes into an opportunity.

How to turn market crashes from adversity into an opportunity?

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During a market crash, the prices of stocks and NAVs of mutual funds are available at lower costs and valuations, right? That is exactly what makes it imperative to turn such adversities into opportunities to buy the stocks or invest in equity mutual funds at lucrative and low prices, hence giving you an opportunity to make some good buy at dips.

Even one of Warren Buffet¡¯s quotes is on similar lines - Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down.

It certainly makes sense too. Doesn't it? Buying something at lower valuations is what enables you to sell it at higher prices later on, hence fetching you profit. Similarly in the market, when you buy stocks at lower prices or invest in equity mutual funds at lower NAVs during market corrections, you enable yourself to reap the benefit of such downfalls and later earn capital gains by redeeming or selling when the market recovers, bounces back and turns bull.

Also Read: Things To Know Before Investing In Equities Now That Markets Are Soaring

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