Why Did the Stock Market Crash and What Should You Do Now?

If you are an investor in the stock market, the happenings of the last
few days must have caused a lot of concern. Remember the black Tuesday
of January 22 when the market plummeted by more than 11 per cent
during the first few minutes of trade. Nervous sellers pushed the
panic trigger, sending the markets into a free fall, until it hit the
circuit breaker, which automatically caused all trading to come to a
halt, both, at the BSE and NSE. The 30 stock Sensex lost almost 2273
points during the day, before some value buying made it recoup some
losses. Finally, it closed the day at 16,729.94 points, still down by
875.41 points. The outlook for the share market seems to have changed
overnight. Let's take a look at the prime factors responsible for such
a drastic fall in the markets.
Fears of a recession in the US One of the biggest reasons for the
heavy duty fall in the markets is a fear of recession in the US
economy. The global investment climate has changed with the impact of
the sub-prime crisis in the US mortgage market taking its toll. Big
investment banks and conglomerates are declaring huge losses and
investors' confidence is completely shaken. There is a saying that
when the US sneezes, the whole world catches flu. No wonder that most
of the economies are having inter-linkages with what is happening
there. The after effects are felt in our markets also as the negative
impact on IT companies, BPOs, KPOs, export oriented units and other
sectors are feared in the long run.
Huge selling by FIIs and hedge funds Hedge Funds and Foreign Financial
Institutions (FIIs) have also started selling in our markets. This is
because they want to reallocate their investments and book profits to
cut their losses due to the economic meltdown. The volatility of
financial markets seen today is the result of continuing and heavy
selling pressure by investors of all classes due to uncertain times
and events.
IPOs drained out liquidity from the system Domestic factors also
contributed to the record fall in no small measure. The primary market
was inundated with a large number of IPOs. Liquidity was sucked from
the market as people invested in these offerings with expectations of
windfall gains on listing. Reliance Power IPO was oversubscribed by as
many as 72 times with investors putting in bids for over 1,654.8 crore
shares as against 22.8 crore shares offered. As per an estimate, more
than Rs 60,000 crore was locked in the offer by way of application
money, thereby causing liquidity problems in the secondary market.
Don't panic and stay invested for the long term If you are a long term
investor, who has invested in fundamentally strong companies, you
should not be worried too much about volatility and sudden downturns.
Remain invested and use the opportunity to buy at lower levels. There
is absolutely no need to press the panic button and start selling
amidst high volatility.
Somebody once asked the investment guru Warren Buffet about when the
right time to sell one's stocks is and the answer was 'Never; if you
have quality investment'. Also, if you do not have a high risk taking
capacity, do not try to make a fast buck by investing in the so called
momentum stocks. They may lose their value in no time and you will be
holding next to nothing. So be a smart investor and stay invested for
the long term.

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