The experts say economic downturns are the best time to invest in the stock market. But most people outside of broker circles don’t see how this makes sense.
You’re probably wondering how this is good advice. The news from the Nigerian Stock Exchange says share values are sagging. Key indices are often in the red. Investors are pulling out. Understandably, you’re reluctant to go in the opposite direction from public sentiment.
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Should you just take the risk and put your funds in a depressed stock market?
Here’s our answer: you could. As long as you know how the market works.
In this article, we’ll tell you why this might be a good idea, especially if you’re hedging against losses in the real value of your wealth during financial crises. We will also show you how to go about this, so you don’t wind up losing money.
Why it’s still a good idea to invest in the stock market
People run out of the stock market during downturns because they don’t want to lose money. Again, that’s understandable. Who wants to see the value of their decade-long investment halved in less than a month?
But if you’re new to the stock market, you’re coming in without any losses on your hands. And because stock prices have fallen, you can buy them at a fraction of their peak price.
If they are good stocks, their value won’t remain low forever. They will bounce back. And if you decide to sell after their price goes up, you’ll make a profit.
In simple terms: a good stock with a low price is a bargain you shouldn’t pass up. They could make you wealthier when the bad times pass (and they always do).
The challenge is in finding out what the good stocks are. That’s what we’re tackling shortly.
First, let’s tell you how to engage with the market.
How to invest in the stock market
You can invest in the stock market through a stockbroker. The stockbroker is an agent who is authorized to buy or sell stocks on their clients’ behalf. They should be registered with the Securities and Exchange Commission (SEC).
There are many stockbroking firms you could choose from. But be sure to compare their offerings before taking your pick.
Next, register with the stockbroker, and fund your account so they can buy and sell shares on your behalf (or as you direct them).
You can also access Nigerian stocks through investment apps like Yochaa, Chaka, and Bamboo.
How to make successful investment in the stock market during a downturn
1. Don’t buy stocks. Buy stakes in businesses.
Of course, you’re still buying stocks. But you should be conscious of the fact that you’re buying part of a business. The performance of their stocks or shares will ultimately depend on how well they’re doing in the real world.
If the business is performing okay and earning profits, you’ll see the value of your shareholding rise. And you’ll earn good dividends as well. If it’s doing badly, you could lose a lot of money.
But aren’t we talking about investing during a recession? What businesses will do well enough in a recession to yield share price rises and dividends for you?
The next point answers this question.
2. Invest in recession-proof companies
Recession-proof businesses are companies that aren’t significantly impacted by recessions. Some of them even thrive in such periods.
These include companies that deal with consumer essentials and other crucial services. If it offers a service that people can barely do without, then it’s probably a good investment choice.
3. Seek out companies with low debt and strong balance sheets
You should know what a company’s financial position is like before putting money into it. This becomes doubly important during a recession.
The best way to do this is to scrutinize their financial statements. Organizations listed on the Nigerian Stock Exchange (NSE) are legally obliged to publish their annual reports. They will usually make those reports available to the public via their website.
If you can’t understand those documents, you can ask someone more knowledgeable to explain them to you.
Don’t invest in businesses that display significant financial weakness, or are heavily indebted. Go for stable organizations.
Find our comprehensive listings of businesses in Nigeria here
4. Consider government bonds
Government bonds are among the safest havens in troubled times. The thinking behind this is simple: governments are rarely in the front row of organizations declaring bankruptcy. They are the least likely to default on credit from lenders.
One instrument in this category is the FGN Eurobond. It is issued by Nigeria’s federal government to raise capital from foreign markets. But you can invest in it as well. Because it’s denominated in dollars, it’s a great way to protect your money from exchange rate fluctuations.
5. Take the long view
You might be tempted to seek profit from the daily swings in stock prices. Just buy stocks today when they’re priced low and sell them tomorrow when their value suddenly rises 10%. This looks like a smart way to trade. But it’s not the smartest in the long run.
Research shows that you’ll earn more in the longer term if you held your stocks for longer. Of course, you should be sure that they are solid stocks in the first place. But when you do find those good stocks and hold them for years, you could earn in the long term than if you were simply hunting for quick profits over shorter periods.
6. Let rationality override emotion
Here’s a hard truth: stock trading isn’t for the faint-hearted. Share prices rise and fall all the time. And the sentiments of others in the market can be overwhelming. Unless you’re strong-willed and able to work with the facts, your faith in your strategy will wane, and you’ll end up making bad decisions.
Keep your eyes on the fundamentals, regardless of what the herd says. This is the approach that many successful investors have taken, and it’s why they have profited when others have lost money.
Financial meltdowns are a part of economic life; we can’t erase them from existence. What we can do is protect our wealth from their devastating effects.
Stock markets present you with an opportunity to do this. They are also affected by the state of the economy, but there will be havens within them that you can run to.
Featured image source: Independent Newspapers
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