How a stock market crash gives retail investors a chance to buy cheap shares

With suggestions that a stock market crash is on the cards, here’s why I think retail investors like me could do well by preparing for an opportunity to buy cheap shares!

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With so much chaos in the US markets, there’s increasing chatter that a stock market crash could happen in the coming weeks. If it does, I think it’s important that investors like me don’t panic and sell their stocks at a loss. In fact, I’ll be buying instead. As happened in the months following the March market crash last year, many stocks saw their share prices eventually making a decent recovery. Some investors had sold out at the bottom, but those who bought in at the low point will have made a decent return.

Is a stock market crash imminent?

Whether a stock market crash is about to hit, or the financial markets are just enduring a short-term period of intense volatility remains to be seen. The increase in retail investors taking an interest in day trading is unprecedented. It’s something that’s shaken the Wall Street stalwarts and may well result in regulatory changes across the board. In the meantime, we’re witnessing a raging storm of individual investors versus the establishment. The reason some speculate that this may lead to a correction or crash is that many US stocks have valuations that seem unsustainably high, meaning it really might not take much to topple them.

With momentum driving many stocks to sky-high valuations, I think there’s a risk this could hurt retail investors. However, volatility presents an opportunity to buy stocks in a dip. While some share prices surge, others fall, and this gives investors the chance to buy their favourite shares when they’re cheap.

Systematic risk vs unsystematic risk

Much as I’m keen to buy shares in a crash, I can’t deny that there are risks involved. And the types of risk vary. Systematic risk is the risk present in the overall market, and there’s little we can do about it as retail investors. The present battle against the hedge funds is an example of unexpected systematic risk. The opposite of this is unsystematic or diversifiable risk, which concerns specific risks a company or its industry faces. This is easier to consider when choosing which stocks to buy.

For example, the oil industry is in decline because the rise of green technology and renewable alternatives are favoured just now. This means oil stocks are deemed risky by some. I understand these risks to the sector, but I still like investing in individual oil stocks such as BP and Shell. That’s because the world still uses oil in many of the things we take for granted daily. Therefore, I don’t believe the demand for oil is going to disappear into thin air. I also like that BP and Shell are diversifying into renewables, so their energy portfolios should balance out in the future.

Preparing for a stock market crash

As a retail investor, I think it’s always a good idea to prepare for the worst. This approach can help protect my portfolio from unexpected trouble. How do I do that? Diversification is a good hedge against problems specific to sectors or individual stocks. I think it’s also a good idea to have some money in cash ready to buy the stocks I like when a correction or market crash comes. I like to monitor the markets and research companies I’m interested in. Then, when I see their prices fall, I can buy cheap shares, reasonably confident there’s value in my purchase.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen owns shares of BP and Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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