What Should You Do When the Share Market Is Down

Downtrends are a crucial component of the securities market. The primary reasons for share market downturns include global economic trends and national policy changes. As an investor, especially if you are new to the stock market, such downturns can be unsettling. 

You need to know why these crashes happen, what happens when they do, and what they mean for you. By being informed, you can make smarter decisions about your investments and avoid acting impulsively. 

Several factors can contribute to the share market going down. Understanding these factors can provide clarity during turbulent times:

• Global Economic Trends

Indicators such as interest rate hikes or geopolitical tensions can influence investor sentiment. For instance, rising U.S. Treasury yields do exert downward pressure on global equities, including Indian markets. 

• Domestic Macroeconomic Indicators

India's economic health plays a pivotal role in market performance. Factors like GDP growth rates, inflation, and fiscal policies can sway the confidence of investors. For example, lower quarterly earnings or a fiscal deficit can lead to market corrections.

• Corporate Earnings and Sectoral Impact

A severe decline in the financial performance of many companies together can also lead to the share market going down. Disappointing earnings reports can lead to stock sell-offs, bringing down the overall share market.

• Supply and Demand Imbalances

Market declines may occur when there is an imbalance between selling and buying pressure. When selling pressure outweighs buying interest, stock prices tend to fall. Persistent selling across sectors can create widespread pressure, leading to broader market corrections or downturns. 

• Geopolitical or Crisis Events

Wars, pandemics, or political instability can create uncertainty, leading investors to pull back from equities. When a large number of investors back off from equities, market declines occur.

A declining market can have both psychological and financial impacts. Here are a few examples: 

• Portfolio Devaluation: The value of investment portfolios can decline, sometimes significantly, depending on the types of assets held and their exposure to market volatility

• Investor Sentiment: Fear and uncertainty can lead to panic selling, which may worsen market declines

• Delayed Investment Decisions: Potential investors may postpone entering the market, awaiting stability

• Shift in Strategies: You may reallocate assets, moving from equities to safer instruments like bonds. 

• Credit crunch: Due to increased concerns about defaults, lending institutions may adopt a more cautious approach, making it more difficult for you to access financing

The share market going down is a natural part of the economic cycle. However, market downturns are often accompanied by increased volatility. Declines are typically measured in percentage terms and happen in two main forms: 

• Corrections: A market correction is typically defined as a decline of 10% or more in stock prices from their recent peak. While they can be detrimental to short-term investors, they offer growth opportunities in the long run. 

• Bear Markets: A bear market occurs when stock prices fall 20% or more from recent highs. They are typically more severe than corrections and may last for a longer duration.
  

Historical data shows that markets have always rebounded after downturns. This highlights the importance of maintaining a long-term investment perspective.

Investors react differently during market downturns. The table below summarises common behaviours and their typical characteristics.

Recognising responses may help you choose strategies to align with your goals and risk tolerance.

During a market downturn, taking a disciplined approach is crucial to protect and grow your investments. Here are a few things to consider:

• Avoid Emotional Decisions: Reacting impulsively can lead to regrettable financial choices

• Review Investment Goals: Ensure your investments align with your long-term objectives

• Stay Informed: Rely on credible sources for market updates

• Consult Professionals: Seek advice from certified financial advisors when in doubt

To maintain market integrity, Indian regulatory bodies have implemented certain mechanisms. These include the following: 

• Circuit Breakers

These are thresholds set to halt trading temporarily during significant market declines. They prevent panic selling. There are various circuit breaker rules in India provided by the Securities and Exchange Board of India (SEBI). These include index-based circuit breakers and stock-specific circuit limits. 

• Regulatory Oversight

SEBI monitors trading activities to prevent malpractices and ensure transparency. It ensures corporate governance, fair trading, transparency, and investor protection. 

• Margin and Risk Norms

SEBI and exchanges set risk-based margin norms to prevent excessive leverage and maintain market integrity. This is because brokers may increase margin requirements in times of extreme market volatility. 

Focus on these key practices to take informed decisions about your investments during a market crash:

• Official Sources: Regularly check updates from National Stock Exchange (NSE), Bombay Stock Exchange (BSE), SEBI, and the Reserve Bank of India (RBI)

• Economic Indicators: Monitor indicators like inflation rates, GDP growth, and employment data

• Avoid Rumours: Be cautious of unverified information, especially from social media

• Continuous Learning: Educate yourself about market dynamics to make informed decisions

Market declines, though difficult, are short-term phases. By understanding the reasons for share market downturns, you can better manage your investments during these periods. Remaining updated, making informed decisions, and keeping your goals in mind enable you to survive volatility.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

https://www.moneycontrol.com/news/business/markets/sensex-crashes-over-800-pts-nifty-below-24-800-weak-asian-cues-other-key-factors-behind-market-decline-13048390.html

https://www.financialexpress.com/money/how-to-deal-with-a-stock-market-crash-10-points-3801638/

https://hdfcsky.com/sky-learn/margin-trading/pros-and-cons-of-margin-trading

https://isfm.co.in/circuit-breakers-in-the-indian-stock-market/#:~:text=Circuit%20Breaker%20Rules%20in%20India%3A%20SEBI%20Guidelines&text=Each%20stock%20on%20the%20NSE,price%20fluctuations%20in%20individual%20stocks.

https://www.livemint.com/market/facing-mid-life-crisis-make-sure-to-keep-panic-selling-at-bay-during-your-investing-journey-151693283784512.html