What to Do When a Stock Plummets?
For most people, investing in stocks is a way to gain financial security and increased wealth. But just as stock prices can rise, stocks can sometimes plummet as well. When stocks plummet unexpectedly, it can cause panic, stress, and fear.
However, a stock that drops in price is not necessarily a bad thing. In certain cases, it can even present investors with an opportunity to make a profit. Before taking any action, though, it’s important to have a good understanding of what’s going on in the market.
Here’s a look at what investors should know and do when a stock they are holding drops in price.
Step 1: Stay Calm and Evaluate the Situation
When a stock plunges suddenly and unexpectedly, it can be a shock to investors. But it’s important not to panic. Stepping back and evaluating the situation is the best way to figure out the next steps.
It’s important to remember that no two stocks are the same. A stock may be plummeting for a variety of reasons that have nothing to do with the company’s performance. It could be due to macroeconomic factors, sentiment in the market, or industry-specific issues.
Before diving into what to do next, investors should try to understand why the stock is dropping in price. This can be done by reading analyst reports and industry news, as well as doing research into the company’s fundamentals.
Step 2: Assess Risk Level
Once investors know why the stock is falling, they’ll need to assess their risk level – which will inform their next steps. A stock’s risk level depends on factors such as the company’s long-term prospects, the volatility of the stock, and the investor’s goals.
For example, if a stock is falling due to macroeconomic factors that could improve in the near future, it may be worth taking a gamble on the stock and holding for the long-term. On the other hand, a stock dropping due to poor fundamentals could be too risky for investors to remain in their position, and they may want to consider selling.
Similarly, investors who are looking to make a quick profit may decide to buy more of the stock while it’s low and then sell it when the price bounces back up.
Step 3: Decide Whether to Buy, Sell, or Hold
Once investors have analyzed the situation and assessed their risk level, they can decide whether they want to buy more, sell, or hold the stock.
If they decide to buy, they should use a limit order to prevent radical swings in the price. If they decide to sell, they should place a sell stop order, which will trigger a sale once the price reaches a predetermined level.
Holding onto the stock, especially for the long-term, could also be an option for investors who are comfortable with the investment’s risk.
Step 4: Avoid Chasing Losses
Many investors make the mistake of trying to “chase losses”: that is, buying more of a falling stock in hopes that the price will bounce back quickly and enable them to break even. However, this almost never works and can lead to more losses.
If the fundamentals of the stock haven’t improved and the price continues to drop, investors will end up losing more money. Similarly, investors should be cautious when buying a “cheap” stock. Just because it’s low priced doesn’t mean it’s a good investment.
When a stock suddenly plunges, it can be a stressful and nerve-wracking experience. However, it’s important to take a step back and evaluate the situation before taking any drastic action.
Analysis of the company, its fundamentals, and the overall market environment will help investors decide whether they should buy, sell, or hold. It’s also critical to avoid chasing losses and to err on the side of caution when buying “cheap” stocks.
With the right approach, investors can emerge unscathed – or even capitalize on – a stock’s rapid decline.
