Should you Invest when the Market Drops?

 If you can manage to pick the bottom of a down market, you can make a lot of money trading stocks. The problem is, few investors actually pick the bottom, and those that do are probably more lucky than smart.

Supply and demand are the primary factors that drives market prices up or down, and the stock market is no exception. If there are more stockholders who want to sell their stock than there are investors who are willing to buy, the price per share drops, driving the stock market down. Plenty of factors can influence supply and demand, including company performance, positive or negative news about specific companies or industries, world events and political changes.

Why do you need to invest when the market is down?

In the stock market, a herd mentality takes over, and investors tend to avoid stocks when prices are low. Panic selling is often people’s gut reaction when stocks are plunging and there’s a drastic drop in the value of their portfolios. The end of 2008 and early 2009 were periods of excessive pessimism, but in hindsight, they were also times of great opportunity for investors who could have picked up many stocks at beaten-down prices. The period after any correction or crash has historically been a great time for investors to buy at bargain prices.

When you have done your own homework

Down markets can present opportunities for buying the stocks of good companies cheap, but prospecting for a gem offers its own set of challenges. Relying on analysts' price targets or the advice of financial newsletters is a good starting point, but great investors do their own homework and due diligence on researching a stock.