7 Practical Tips to Protect Stocks During Crashes: Everybody wants to get rich. We all look for opportunities, where we can get some extra bucks. And, the best advice we get from successful people is to invest our income and savings. And, let me tell if you don’t know, the stock market for beginners is one of the best performing investments. The long term investments are lucrative here.
But, during the times of crisis, when the market was crashing like hell; everybody who invested there got upset. They felt pathetic losing their hard-earned money. They thought if there were a protection plan against crashes, they would have been, at least, not sad today!
But, this doesn’t mean you should change your mind to invest in the market. These markets suffered recessions, world wars, and several other downturns but still, in the long run, it gave a good return.
The US and Indian stock market itself, gave a return of 10% per annum in the 20th century, which is far better than many of the investments.
However, what if you could protect your portfolio from the stock market for beginners crashes too? Yes, my friend! Here in this article, we would be helping you with seven amazing yet practical tips on how to protect your portfolio against crashes.
7 Amazing Tips to Protect Your Portfolio while Crash in Stock Market
1. Stop Losses
Stop loss is like a god gifted tool for day traders. It is a trading tool which automatically sells a commodity when it reaches a specific price. For instance, say you bought 500 shares of ABC Ltd. at $200 and placed a stop loss at $170 (15% below). Now, if the stock market for beginners crashes, by any chance, suddenly, then as soon as your asset would touch $170, it would be automatically scraped.
There are a plethora of advantages of this fantastic tool, but the most significant is it mitigates your stress level as you do not have to worry about a market crash anymore.
However, for long term investments, it might not be that much of a lucrative tool. Why? Let’s retake the above example and think you bought those shares of ABC Ltd. for ten years. Now, one day the owner of ABC Ltd. faces an accident, and the next morning, the firm’s shares touch the $170 mark. Though the downgrade was temporary, because you placed a stop loss, you had to make the deal.
There are two types of stop losses—one, hard stop loss, and second, trail stop loss. Hard stop loss is a fixed price to sell your asset, while the latter one works on a fixed percentage downgrade.
2. Diversification & Non-Correlating Assets
The trading market is an uncertain and sensitive place. Nothing is guaranteed there, your stock worth $500K could become worthy of $200K, the next day. But, diversification is an excellent strategy to protect your assets. It mitigates the amount of risk involved by investing in assets from different sectors, industries, or places. Thus, if any sector suffers a downfall, other assets would rectify the losses.
Non-correlating assets are assets whose nature and type do not match. Investing in them in a balanced manner would also protect your portfolio. It depends upon the risk and returns you are expecting. Usually, the share and stock market for beginners is volatile, while gold and bonds are not. But the amount of return also differs here. A steady and safe bet could be real estate here.
You can also make a plan according to your age and needs & requirements. Keeping your portfolio at low risk doesn’t always work. Remember, the portfolio’s performance also depends upon the allocation of your investments.
3. Dividend-Paying Investments
Dividends are a fixed proportion of a company’s annual profit to its shareholders. Investing in a dividend-paying share can act as a hedge against the stock market for beginners crashes. Generally, a dividend-paying company is less volatile and attracts more investors. Thus, it ensures long term earning and growth.
Also, an annual dividend would get you a small yet regular income. Remember, not every company pays out of profits and not every company which pays is a good one. Thus, make sure you invest in a stable and trustworthy firm.
It is a proven method to protect stocks of your portfolio and is a critical component of successful investors.
4. Call Option
Suppose you find a magic spot in your backyard. It gives you the following facility. You purchase any stock of your choice, if at expiry; it moves up, the gains are yours. And, if it goes downward, you don’t need to worry; you’ll get your money back! Sounds like a dream, right?
But, a call option is precisely the same thing. Yes, just it charges some premium fee for this fantastic feature. Call option makes you buy a stock at a strike price for a particular period, along with a call option premium. If the stock rises, you’ll get your gains; and if it degrades, then you can nullify the agreement.
There are two parties involved in it- call the seller and call buyer! You, in this case, were the call buyer. Why call sellers do such types of agreements is a whole different topic. Leave that!
It is a fantastic tool for protecting against the stock market for beginners crashes, but for the short term only!
5. Put Option
Put Option is the right to sell a financial instrument at a fixed price between the option buyer and seller. According to it, if a buyer feels that any stock’s price value is about to fall in upcoming days, then he can purchase the right to sell that stock at a fixed price, no matter what the price is, on the expiry. Let’s understand this with the help of an example.
Suppose a company’s stock suddenly rose 90% in the last six months and reached $190. Now, you think that its value would deteriorate in the upcoming time. So, you can purchase a put option at the current price, along with some premium charge. Now, at the expiry, the price reaches $120. While everybody else would get $120 by selling this stock, you can sell that stock at $190. It is similar to the call option but acts inversely.
It can also be a fantastic tool for protecting your portfolio. However, if the same stock would reach $250 here, you would still get $190.
A simple market index of a country is the statistical data of the top companies and their performance. These companies are generally decided as per their market value, and numbers of companies differ, country to country. For instance, the simple index fund of the USA, i.e. S & P 500, contains the top 500 companies of the United States.
It can be the best long term investment and generally gives a reasonably good return too. It happens because an index consists of so many companies from different sectors, industries, and nature, that all of them failing together is nearly impossible.
However, note that it is very vulnerable to short term investments.
7. Invest Rationally
All of the tips mentioned above would be useless if the stocks you are buying are petty and highly risky. Usually, such companies are unable to suffer the stock market for beginners crashes, and then their shareholders lose all their money. Thus, it is always recommended always to do a fundamental analysis of the organization; you want to invest.
Generally, a company which has more assets than liabilities is considered safe. However, it is not always the case. A company with significant debt can grow, but the risk is slightly high here.
So, these were some astounding tips on how you can protect your portfolio. Remember, the stock market for beginners is a volatile and risky place and moves according to the economic situation. Thus, these tips don’t guarantee anything, but at least can reduce the risk. Now before heading to the bottom line, let us quickly go through an extra tip.
Extra Tip: If you are a beginner in trading, then we would suggest you take some professional advice from someone else. The person can be your uncle, neighbour, friend, anyone you think knows something extra than you. Besides, you would also be able to get a different perspective on the speculations you make.
The Bottom Line To Protect Stocks
The crashes are prevalent in the stock market for beginners. These markets cover up themselves quickly. For instance, after the 2008 crash, the market recovered itself in 4 years. And, someone who would have invested during the market crash, that person would have smoothly earned a hefty amount.
And, honestly speaking, if you are someone who wants to invest his amount for the long term, then you should not worry about these crashes at all. The crashes come and go, but the stock market for beginners will grow.
Just make sure to be a bit smart to take full benefits.