When stocks are down

In my third blog, (this is the 4th) I mentioned that the stock market is where you should be when it is making a lot of money (going up) for everyone, that even the price of the lousiest stocks are rising. But what do you do when stocks are down.

Let’s clarify that a little bit. What I meant by that statement is that you should already be there in the stock market when it starts making a lot of money. What it does not mean is that you should only go into the stock market when it has already made a lot of money. If you do that, there’s a good possibility that you are going in a bit too late.

Now, as I am somebody who is not claiming, nor pretending, to be an expert, I would suggest that we avoid the contentious issue about “the right time” to get into the stock market. I would further suggest that when you have the time and the resources, you go and read the works of the experts. Those who use Fundamental Analysis before plunging in and those who depend on the use of Technical Analysis for going in and out, not just of every stock, but of the whole market.

If you are still with me, I would stick to answering the question we left hanging in my third blog. What do we do when the market is losing us, instead of making us, money?

Well, let us stick to practical observations shall we? Obviously, the time when the market would most likely be losing us money is during the time almost exactly similar to the kind of times we are having now (with housing meltdown in the U.S., credit crunch everywhere, threats of global recession, slowing down of economies, rising inflation, etc. ,etc.) I hope you are reading the news so you’ll have an idea how low the world securities markets have gone down since August 2007.

What do we do at times like these? Remember the most basic of all the principles in earning money in any market: buy low, sell high? Well, if you are NOT yet in the stock market, times like these present a very good opportunity to look for stocks that you can buy low. So, at times like these, I would be up and about looking for those “cheap stocks”.

Let’s stop here for a while and clarify another thing – cheap stocks. If you see two stocks, let say, stock A is priced at $500 and stock B is going at $50 it does not immediately follow that stock B is the cheap stock. For all you know, stock B is the expensive stock and stock A is the cheap stock. You will know that the stock is cheap if you compare its present price to its own price over a period of time while considering the continuous health of the business of the company that issued the stocks.

In our examples A and B, do not compare A to B. Instead, compare A to A and B to B. If the price of A has gone down to say $300 and its business prospects has remained the same and it didn’t go thru any stock split or the company has not just issued stock dividends, there’s a good probability that the price of A is undervalued – or has become somewhat cheap.

But there are many other things to consider in determining if the price of a certain stock is already cheap. If you don’t have yet the perspicacity to determine things like that, please get the advice of the stock market experts. You can go to a stock broker, a financial advisor or a financial analyst. Just remember not to buy everything they dish out hook-line-and-sinker. Some of them have their own interests to serve. It is best that you take very good care of yours. At least, take everything they say with a grain of salt.

Good! We already have an idea on what to do in a down market – if we are not yet in it when the market goes down. But what if we are already invested and the world economy has dragged the market down and our stocks along with it?

That, my dear friends, is another contentious issue where every single expert’s opinion is better than the rest. I suggest you go out there again and read about their opinions. It is better that way so I won’t be misquoting them. Besides, with the kind of money that you are eventually bound to make, if you learn the ins and outs of stock market investing, all the efforts that you will have exerted would be all worth it.

What is my own take on this? If you had been diligent enough in choosing which company’s stocks you buy, and at what price, and you are still confident with the future of the companies which stocks you bought, my opinion is that you should stick with them. But pleaseee, don’t take that as an advice. It is just an opinion. I am not the expert, I am just the tour guide here. My self-imposed job is to show you some of the things that can be done. I am not here to tell what you should do or the best way to do them. That’s the job of the experts, and there are many of them out there.

Anyway, selling your stocks when you see them begin to bleed could be the best decision you will ever make, but that is also the best way to confirm your losses in the short term. Keeping your stocks intact will give their prices a chance to recover and maybe even produce big profits – but it can also give you even bigger losses.

Still, holding or selling your stocks, or losing money, are not the only things you can do in a down market. That is, depending on which part of the globe you are trading or investing. By that, I mean – which stock exchange. Other exchanges would allow you to hedge against possible losses by Short-Selling stocks and by Options Trading.

Please, allow the experts to explain to you Short Selling and Options Trading properly by reading their books – at the very least.

My ten cents worth on options trading is this: It is not for the uninitiated or the barely initiated. Options are like guns: you can use them to defend your positions – or to kill your positions. Remember Barings Bank?

It was one of the oldest banking institutions in England. It was reported that even Her Majesty, The Queen, put her money there. It was brought down by a single options trader.

And that trader was supposed to be already an expert.

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