There are going to be times in every person’s portfolio when they need to consider if they might need to pull the plug before something major happens. It is going to be beneficial to your capital and your ability to invest in future stocks if you know when the time might be right to consider selling. It is important to understand that is going to be your individual choice but if you are fully aware of the warning signs then you will be better prepared in the long run.
There is a great quote on Investopedia site that states: ‘Not all bad news is created equal.’ This is a highly cautious concept and in the terms of the stock market this is true. You will need to decide what signs are going to constitute that you might consider moving your stock, some of the news that you are concerned about might not have any long term effects on your actual stock and it might just be a quiver in the stock market. But on other occasions it might be the right time to consider buying too.
Consider your options
There are times when you need to think about the warning signs that your stock is just about to crash. There are many different formulas that can predict market crashes and there are many instances that these might work but sometimes it is important to go with how you feel about the situation yourself. If a company changes the CEO, it might have great benefits for the company but you might not like their ethos and this is fine, no one has to force you to place your capital in a company if you feel that you have a different approach or are uncomfortable with the management team. It is about personal choices as well as the bigger picture too.
Some of the signs that have pre-dated a crash:
- Be cautious of the margin debt each time this has increased above the 2.5% there has been a margin crash. This was evident in the 1929 crash, the 2000 and again in the 2007 stock market crashes. It is something that could potentially damage all the stock that you hold and it is vital that you are aware of the position at all times.
- If there are any signs that the low interest rates are on the move this could indicate that many companies that have borrowed heavily might not be able to perform as well. This could mean that the companies could default on dividend payments. It is a time to be cautious and to look at the companies carefully, see if they have borrowed heavily and if they have, is the rise in interest payments likely to mean they are not going to be able to afford the change in payments? .
- If you follow the VIX scale then you need to be cautious because there are suggestions that the over-confidence in the market could suggest that the market is in a volatile state.
- Petrol and the ability to obtain this resource is vital to the stock markets, if this commodity was limited in any way then it can have a disastrous effect. It will have an effect on the ability to trade in many companies because without fuel many of the services that are relied upon stop working and this can justify an increase in prices and this will make the economy less stable. It is a factor that can have consequences around the world and it is an area that plays a vital role in stability of the markets.
- It is possible with the market as buoyant as it has been in the past that the shares that you own are not really the true value, they might have been overvalued in recent months then it could be time that you move your investments elsewhere before you lose capital.
- There are going to be times when your share prices fall as well as rise and this is just part of the stock market. But there has to be a point when you look at the price dropping and you feel that there is little hope of it rebuilding up to previous highs, this could be the time that you move your investment to a different company before you lose all of your capital.
- Over the counter stocks are sold with less information and this could mean that you are not fully aware of the situation that the company is in, they might be close to bankruptcy and you might not be aware of this. This is one reason why it is important that you are checking out companies before investing in them.
As with all investment on the stock market there are going to be some risks that you need to face. The higher the risk the greater the return but this is because the risk you are taking is with your investment money and you will need to make sure that you are comfortable with the risks. If you feel that the risk is too much then you need to consider your portfolio and to make adjustments accordingly.
There are some people that are more comfortable with taking risks than others and this is why it is important to understand what those risks are before you take them. If you are not comfortable with high risks with your capital then it is fine to choose the safer route, it will take longer to build up your capital but it can be less stressful in the long run. It will also mean that you will have the greater chance of holding on to your capital if the stock market does crash.