Why Did the Stock Market Crash and What Should You Do Now?


If you are an investor in the stock market, the happenings of the last few days must have caused a lot of concern. Remember the black Tuesday of January 22 when the market plummeted by more than 11 per cent during the first few minutes of trade. Nervous sellers pushed the panic cause, sending the markets into a free fall, until it hit the circuit breaker, which automatically caused all trading to come to a stop, both, at the BSE and NSE. The 30 stock Sensex lost almost 2273 points during the day, before some value buying made it recoup some losses. Finally, it closed the day at 16,729.94 points, nevertheless down by 875.41 points. The outlook for the proportion market seems to have changed overnight. Let’s take a look at the chief factors responsible for such a drastic fall in the markets.

Fears of a recession in the US
One of the biggest reasons for the heavy duty fall in the markets is a fear of recession in the US economy. The global investment climate has changed with the impact of the sub-chief crisis in the US mortgage market taking its toll. Big investment edges and conglomerates are declaring huge losses and investors’ confidence is completely shaken. There is a saying that when the US sneezes, the whole world catches flu. No surprise that most of the economies are having inter-linkages with what is happening there. The after effects are felt in our markets also as the negative impact on IT companies, BPOs, KPOs, export oriented units and other sectors are feared in the long run.

Huge selling by FIIs and hedge funds
Hedge Funds and Foreign Financial Institutions (FIIs) have also started selling in our markets. This is because they want to reallocate their investments and book profits to cut their losses due to the economic meltdown. The volatility of financial markets seen today is the consequence of continuing and heavy selling pressure by investors of all classes due to uncertain times and events.

IPOs drained out liquidity from the system
Domestic factors also contributed to the record fall in no small measure. The dominant market was overwhelmed with a large number of IPOs. Liquidity was sucked from the market as people invested in these offerings with expectations of windfall gains on listing. Reliance strength IPO was oversubscribed by as many as 72 times with investors putting in bids for over 1,654.8 crore shares as against 22.8 crore shares offered. As per an calculate, more than Rs 60,000 crore was locked in the offer by way of application money, thereby causing liquidity problems in the secondary market.

Don’t panic and stay invested for the long term
If you are a long term investor, who has invested in fundamentally strong companies, you should not be worried too much about volatility and sudden downturns. keep invested and use the opportunity to buy at lower levels. There is absolutely no need to press the panic button and start selling amidst high volatility.

Somebody once asked the investment guru Warren Buffet about when the right time to sell one’s stocks is and the answer was ‘Never; if you have quality investment’. Also, if you do not have a high risk taking capacity, do not try to make a fast buck by investing in the so called momentum stocks. They may lose their value in no time and you will be holding next to nothing. So be a smart investor and stay invested for the long term.

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