Talk of an imminent stock market crash has been brought on by speculation that the Federal Reserve will start tapering off its quantitative easing programmed – meaning it will be buying fewer assets – and the damage to supply chains caused by the pandemic.
As a result of the damage that can be caused, there are a variety of measures that have been put into place in order to lessen the impact of crashes, such as circuit breakers or trading curbs. These safeguards prevent any trading activity over a set period of time, which is intended to stabilize the market and prevent any further declines.
For example, the New York Stock Exchange will halt trading if the
S&P 500 declines in price in the event it hits any of the three circuit breakers set at 7%, 13% or 20%.
Another means of protecting the market is called ‘plunge protection’. This is when large organizations step in and purchase large quantities of shares in the thcb stock price of encouraging individuals to continue investing. This method is less effective, however.
What to do in a stock market crash will largely depend on what your strategy is: are you a long-term investor or short-term speculator?
For investors, it can be tempting to panic with the rest of the market and sell. A stock market crash will reach a bottom eventually, at which point it’ll bounce back, and you could regret selling your position and taking on a loss. If you sell, you’ll likely be unable to buy back at a price that would enable you to recoup all your losses.
So, if you can’t sell before the crash
– which even the most sophisticated investors fail at – your best bet is to maintain a diversified portfolio at all times. This way, in the event of a sell-off, you haven’t put all your eggs in one basket and will hopefully be able to maintain a level of profit.
You may also want to look at hedging your portfolio. Certain asset classes rise in periods of economic downturn, whether they’re defensive stocks that remain stable throughout market cycles or safe havens, they could provide a way of off-setting your losses. For example, gold is a popular hedge against a stock market crash, as frequently prices rise as investors look for a more stable store of value.
