- Date : 11/09/2020
- Read: 5 mins
How investments in stock markets behave; reasons why people are actively participating in stock trading during the pandemic.
The ongoing COVID-19 crisis is causing a major economic slowdown across the globe. When WHO officially declared it a pandemic in March, the BSE Sensex fell by 8.18%. Looking back at some of the major stock market corrections in India, most of them were driven by disruptions followed by a prolonged impact on the market sentiment. In 2020, that cause is clearly fear and uncertainty.
It’s too early to say how effectively the world will cope, and what the effect on trade, demand and supply, etc. will be. If one goes by experience, evidence suggests that a sharp fall in market levels presents attractive opportunities for long-term investors. This comes with a caveat of a probable extension in the investment horizon and one’s capacity to ride out the volatility.
The stock market attraction
Stock markets often come into the limelight during times of disruption, and it’s common to see people discussing their experiences, both good and bad. Investing in stock markets has always been an intriguing exercise, with people from varied backgrounds attempting it. Approximately 1.2 million new accounts were opened with the Central Depository Services this year.
Here are some reasons why people are gravitating towards trading in stock markets:
1. Entry opportunity as stock prices fall
The impact of the pandemic was not visible on the stock markets till 1 February 2020. The highest Nifty level was 12,201 and the peak BSE Sensex was 42,273.87 points in February 2020. However, soon after COVID-19 was officially named a pandemic, there was widespread panic. Nifty closed at 7610 on 23 March, a drop of –38% in just 40 days, while BSE Sensex also crashed by over –38% to 25,638.90 points.[ar3] This was one of the fastest crashes in stock market history.
There are many examples of investors earning attractive returns during crashes. The financial crisis of 2008 was a nightmare by all accounts. However, if you had dared to invest on 24 October 2008, when Nifty corrected by 12.2% on one day, you would have earned a whopping 93.4% in one year! During the Asian crisis of 1999, if you had invested on 17 April, when Nifty corrected by 7.4%, you would have earned 49.3% in one year.[ar4] Hence, we can conclude that if one invests when things are in the red and has the courage and patience to ride things out, the investment is likely to be profitable over time.
2. Alternative source of income
The pandemic continues to spread globally, even as most people continue to work from home. Some employees have accepted an unavoidable break in their income or cut in their salaries. At such times, having an additional income from other sources is like receiving a bonus. Stock trading can translate into an opportune way to try to meet monthly expenses. Who would not want more cash in hand?
However, there are a few things that need to be kept in mind. The longer the investment horizon, the safer it would be. You can consider having a diversified portfolio of stock to spread risk. It is also a good idea to read up on a company’s valuations, profits, and earnings. This will increase the opportunity to grow other comprehensive incomes.
3. More time to do research
Investing directly in stocks requires substantial research. A potential investor has to be well-versed with fundamental and technical analyses, which requires a lot of time and effort. Although there are services that offer research reports, you may still wish to spend time and verify the insights. One could also pursue stock trading courses to become a skilful stock market trader.
Since many individuals currently work from home, they are able to save the time they would otherwise spend commuting to work. They have more time to research and become more confident about their decisions. Hence, they are able to devote more time to stock market trading.
4. Proliferation of electronic platforms
The advent of online stock market trading has made it extremely easy for anyone to open a demat account and start trading immediately. Electronic trading allows people to buy and sell stocks on a daily basis irrespective of their physical location. Traders are instantly connected to the stock market either through their smartphones or computers.
Technology has advanced immensely, which makes stock trading very easy and fast. One can opt for mobile trading on the go, and the internet can be smoothly used as the fastest way to trade.
First time traders are warming up to discount brokers as well. Discount brokerages which were already popular, are witnessing tremendous growth thanks to free demat accounts and their flat transaction fee which are extremely competitive. Certain brokers are witnessing 3.5 times growth in their new leads on a month-on-month basis.
5. Sharp cuts in interest rates
This year has witnessed a few rate cuts in a bid to revive the pandemic-hit economy. This puts pressure on banks to lower their interest rates. This, in turn, makes fixed deposits less attractive as an investment option. The State Bank of India (SBI) has reduced its FD rates twice already. A drop in interest rates forces one to consider other investment options to make funds grow faster.
Apart from capital, stock trading is an area that requires conviction, knowledge, patience, and luck. New investors must bear in mind that they must only utilise as much capital as they can afford and should always maintain a stop-loss on their trades. Read this interesting and insightful piece on how to turn stock market volatility into an investment opportunity.