How to Manage Emotions During Market Confusion?

By Angel Broking | Published on 22nd October 2020 | 267

How to manage the emotional upheavals of the stock market

To a novice, the stock market might seem like a place where one can easily make quick bucks. But this is seldom true. Stocks are governed by complex variables, and it takes time to understand market fundamentals. As an investor, you should keep in mind that firstly, you need to have a robust understanding of how the market functions. Then comes assessing your investment horizon – be it short-term or long-term. Alongside, you must keep in mind your individual risk appetite, or the amount of money that you can afford to lose while still remaining up float. At this juncture, it becomes imperative to underline that in stock markets, winning and losing, or rather making profits and incurring losses in investments, are two sides of the same coin. Worried about tackling the emotional upheavals of the stock market? Here is a list of three tips to help you manage your emotions during the turbulent phases of stock markets. Leave your worries aside, and celebrate the colours of Navratri with the market!

Understand that loss is unavoidable: Before beginning your investment journey, you must understand that loss is unavoidable in the stock markets. Even seasoned and famous investors have incurred huge losses at some point in their lives. But despite the setbacks, they maintained their composure and refused to quit. Ultimately, they bounced back with aplomb.

As an investor, another key factor you must consider is although losses are inevitable, the risk can be minimised by making prudent investment decisions. This means investing your hard-earned money in a diversified portfolio of companies. And, you should always zero in on the companies, which provide and exhibit verifiable potential for growth. Having a diversified portfolio of stocks will ensure that even if a portion of your preferred stocks fail to live up to the expectations, or perform miserably, you still have the remaining portion to compensate for the losses. In other words, while creating your investment portfolio, you should always keep in mind the risk to reward ratio. Alongside, you should also have a sound capital management strategy. Protecting your capital, in the long run, will help you minimise losses. To conclude, although profit and loss are part of the game, you can still minimise risks by being judicious.

Don’t get caught in the stock market bubble: Another tip to manage the emotional upheavals of the stock market is not getting caught in a stock market bubble – characterised by the stock market getting irrationally optimistic. In the case of the stock market bubble, people start believing the performance of stocks will only get better. Typically, a stock market bubble is represented by a cycle where there is an accelerated expansion, only to be replaced by contraction. In a stock market bubble, there is frenzied buying by investors. When a large majority of the investors start buying – with the sole motive of making quick profits – the stocks become scarce. This results in a scenario where the prices of stocks skyrocket. Remember, the rapid rise in price of stocks is without a corresponding increase in the company’s underlying value. After some time, investors start realising that the rise in price of stocks was without a viable reason, and they start selling off the stocks. The herd mentality – a key characteristic of a stock market bubble – again follows, and investors quickly start selling their stocks. But now the market starts dipping, and several investors suffer considerable losses. As the market begins to correct itself, the bubble gets punctured or bursts. A stock market bubble burst can result in market devaluation, or even a market crash. While investors face colossal losses, the market recovery rate is painstakingly slow. Thus, as an investor, you must guard against bubbles, and maintain your rational calm.

Trade on fundamentals: Although stock prices can change overnight, a company’s fundamentals doesn’t undergo any change within a few hours. Investing in fundamentally strong companies – in the long run – can help you take emotion out of the game. You must conduct a comprehensive market research to know about the strength of a company. The key parameters to consider before investing in any company’s stocks include market capitalisation, growth in income, net income, debt to equity ratio, price to earnings ratio, issuance of dividends, stock splits, mergers and acquisitions and so on. Remember, the price of a stock is always justified by the underlying value of a company. Although a company with strong fundamentals can be impacted by stock market upheavals, it will eventually recover its strength and position.

Conclusion: Thus, maintaining your emotional composure is an absolute must during stock market upheavals. The above-mentioned tips can help you remain unruffled during challenging times in stock markets. And don’t forget to celebrate the colours of Navratri with the market. Angel Broking wishes everyone happy Navratri, and may the goddess bless you!

Stock pick : Endurance Technologies (Target INR 1,297)

Endurance Technologies Ltd is one of India’s leading automotive component manufacturers with operations in India and Europe. It mainly caters to two and three-wheeler OEMs in India and supplies aluminium casting products to four-wheeler OEMs in Europe. Post Covid19, evolving consumer preference for lower ticket priced means of private transport amid pressurized incomes & awareness around social distancing are expected to act as tailwinds for domestic 2-Ws in India, 4-Ws across developed nations. We believe that Endurance Technologies will be one of the key beneficiaries of pickup in demand in 2 wheelers in India given that it is a key supplier of components to 2-wheeler companies in India.