Stock markets, much like any physical market, can suffer from volatile prices and ‘crashes’. Crashes are events where the stock market decreases dramatically over a short period. This article will deal with what to do if your stock is crashing in the UK.
First of all, it’s essential to know that this kind of thing does not happen very often. The FTSE 100 has never suffered a continuous drop longer than five days and even crashed for less than 24 hours on only ten occasions since 1990. However, when these crashes happen, they can affect many people.
What should you do if your stock is crashing?
While each stock is unique, you can take some general steps if your long-term investment seems to be on a downward trend.
Pull up the company’s annual report
First, pull up the company’s annual report from their investor relations page by comparing the most recent quarter to the same quarter last year. If revenue has slipped by a percentage point or more and net profits have fallen off a cliff over several quarters, it might be time to cut your losses and run.
Before going any further into that option, though, it might be helpful to look at several other metrics that you’ll want to understand before potentially dumping shares of your stock early:
Balance sheet
Compare the most recent financial statements (quarterly) with those of previous years, and make sure that there are no significant changes in assets or liabilities. Suppose you see any significant discrepancies between years. For example, if the company’s inventory steadily increases while its cash reserves decrease, it might signify that something isn’t right with the books.
Revenue
Does this seem to be increasing over time? Are they still hitting their marks on earnings per share? Do you see any severe jumps or declines in these numbers from year to year?
Market capitalisation
Finally, look at the market capitalization. Is this number smaller than it was last quarter? A significant reduction in the size of your investment could signal trouble ahead. It might take a company several quarters to turn things around after going through a rough patch financially.
Other actions to take if your stock is crashing
If, after looking at these three factors; balance sheet, revenue, and market capitalization; you see trends that make you question the long-term stability of your stock, there are some potential actions to take:
Sell
If the company is consistently slipping in any one (or more) of these areas over several months or quarters, it might be time to take your profits. You can also try selling half your shares if that seems more manageable; this has the added benefit of hedging your bets.
Invest
On the other hand, if you see a downward trend, but there is reason to believe that it will reverse itself eventually, you might want to hedge your bets by buying put options as insurance against potentially worse times ahead. For instance, an investor who has been consistently profiting from their stock might buy put options just if the company becomes a target for a hostile takeover and gets sold at a low price.
Watch closely
Finally, suppose you believe that negative trends are temporary and have not spotted any major red flags in lawbreaking or fraud*. In that case, you can keep an eye on things without changing your investment strategy. Learn what signs indicate whether things are improving or taking a turn for the worse. Suppose your company’s stock is one of many plummeting in tandem. In that case, this could indicate a broader economic problem that would affect much more than just the fortunes of your specific company.
Bottom line
When you buy shares online, always make sure you consider market fluctuation. If stock markets are not performing well, spread your risk across different funds or companies until things look up again. Also, keep an eye on the market and any news that might affect share prices. If you’re unsure about what to do in a time of crisis, we recommend using a reputable online broker from Saxo Bank.
