Is It Better To Buy Stocks When The Market Is Up Or Down?
It is technical to decide the right time as to when to buy a stock. Your investment’s chances to perform well depend on when you enter the market. Well, when we talk about stock buying, the first question that comes to our mind is whether to buy a stock in a bull run or a bearish trend.
No worries! We have got you covered. Below are a few points you could consider before buying stocks in the stock market to clarify when it is the right time to enter the market. In the following blog, the topics that we’ll be covering are:
- Understanding the market trend
- Buying stocks in a bull market
- Buying stocks in a bear market
- Causes of market correction
- What to do when the market corrects
- Conclusion
Understanding the market trend
What does it mean when we say the market is up or down?
Up trend
So, when we say that the market is up, it is making higher highs continuously, and we can observe a bull run in the economy. The indexes and stock prices are constantly rising, giving tremendous returns to people who have invested in the favour of the market. For example, before the 1992 Harshad Mehta scam was exposed, we observed a bull run in the economy.
Downtrend
On the other hand, when we say that the market is down, it implies that the market is constantly making lower lows. Thus, we can observe a bearish market movement in the economy. The market indexes and the stock prices of the company are continuously falling. A fun fact about the stock market is that you can make money even in declining markets. You can profit from the market if you short your positions and bet against the rising trend.
What moves the market?
Now that we have understood the meaning of up and down in the market. Let’s discover the reasons for the up or down in the stock market. The stock market works on the simple economics concept of demand and supply. The market forces of demand and supply determine the prices of the stocks. One thing to remember is that the supply for the no. of stock in the stock market is limited as a listed company can only issue a countable number of shares. The demand depends upon the company’s financial performance and the news in the market surrounding it. Generally, we see a rally in share prices when the company declares good financial results. Apart from this, companies announcing dividends, mergers, or acquisitions also significantly impact the price movement. On the contrary, other legal, geopolitical, technological, global, and social factors also affect the markets holistically.
Buying stocks in an Up upmarket
As we have discussed above, about the up trend in the stock market. The bull run generally occurs when the overall economy is strengthening, when the stock prices are up by 20% following a 20% previous decline in the share prices. We can observe a bull run with increased investor confidence in the market; companies will be more willing to launch IPOs, and the businesses will get higher valuations for their equity.
Buying stocks during a bull run is considered less risky because it doesn’t make sense for you to sit on the cash pile and ignore the ongoing rally in the market. Investing your money in the stock market when the market is up requires less research. But still,
Buying stocks in a down market
Talking about the downtrend in the market. A downtrend is followed by the 20% fall in the stock prices from the recent highs amid widespread pessimism and negative investor sentiment. Generally, bear runs occur when the overall economy falls, and rising unemployment persists in the nation. Another definition of a bear market is when investors are more risk-averse than risk-seeking.
Buying stocks when the overall market is down is a strategy opted by various big investors, as when the whole economy is down, you could get shares at a discounted price than their real worth.
Causes of Market Correction
Market corrections are generally short-term in nature. However, chances are likely that corrections can be a call for the bearish market. But in the long run, markets and stocks manage to retrieve their original levels once the correction is over. A correction is generally a 10% to 20% drop in value from a recent peak. Corrections are seen on the stock indexes or even on the shares of your favourite company. Some of the causes of market correction are listed below.
- Not-so-favourable economic data like job reports, lower GDP, etc.
- A change in interest rate by the central bank (RBI in India) eventually makes it difficult for consumers to get loans at a lower rate.
- Political instability, conflicts, trade tensions, or unexpected geopolitical events can create market uncertainty and fear.
- Lower earnings from the part of top-performing companies represent the benchmark for the performance of the indices.
- General profit booking at the market’s highs and some technical indications like a bearish candlestick pattern can also lead to market corrections.
A market correction can be quite challenging, but you do not need to start liquidating your portfolio or selling your assets (unwanted selling during a market correction can lead to realizing losses); instead, consider it an opportunity to enter the market at lower valuations.
What to do when the market corrects?
We have mentioned earlier that there are typically two types of participants in the market i.e., trader and investor. From the point of view of a trader, one needs to analyse the technical charts and patterns, book their unrealised gains and start looking for some other trading opportunity. But an investor needs to have a long-term mindset and he should have a well-thought-out plan in place to navigate market corrections. Investors generally consider market corrections as a fortunate action since it provides them with an opportunity to buy on dips or lows.
Investors generally develop a curated portfolio with a dynamic allocation of assets. Our suggestion to the investor would be to stick to the investment strategy which they initially adopted and instead of realising your gains, average the stocks that you are holding in your portfolio.
(Note- Averaging is buying more stocks when the price of the stock falls since it lowers the overall buy price of the stock that an investor holds.) Market corrections are like second chances for investors since they get an opportunity to re-evaluate their holdings analyse the stocks that have underperformed and adjust the holding as per their risk appetite. The market has historically recovered and continued to grow over the long term. Avoid making knee-jerk reactions based on short-term events. If you are an investor, you should have an ample amount of funds or sufficient cash in hand so that you can either average the existing stocks or buy any fresh stocks since portfolio readjustment is a part of happy investing.
Also, check out What are some common mistakes that beginner investors make in the stock market?
Conclusion
We all know that market corrections are inevitable, and one should keep their emotions in check while trading or investing in the market. When the market bottoms itself out, leave your holdings in isolation and do not try to time the markets because sometimes anticipating corrections creates more loss than the actual correction. Buying on dips will help you create wealth, and buying on lows will help you generate short-term profits.
For example, if someone had invested in the market during the 2008 global financial crisis or COVID-19, the returns generated on his/her portfolio would have been phenomenal. This is the power of the stock market. To conclude, always invest or trade as per your risk appetite and financial goals. The market will always give you second chances to buy stocks at their highs or lows. Decisions and capital are all yours!
Successful investing requires patience and discipline.
FAQs (Frequently Asked Questions)
- What are the two categories of capital markets?
Two categories of capital markets are primary market and secondary market. - Define Correction.
A correction is generally a 10% to 20% drop in value from a recent peak. - Mention two causes of market correction.
Two causes of market correction are stock earnings and changes in interest rates. - What is the averaging of stocks?
Averaging means buying more stocks when the market is down. - When should we buy a stock while investing?
While investing in the stock market, one should buy according to their risk tolerance, investment horizon and capital.
