The second stock market crash may be upon us. Earlier this week we saw a strong sell-off in the FTSE 100, sending it back down towards 5,800 points. Even with a bounce back today, the news regarding increased lockdowns in the UK will not be shaken off that easily. Although I don’t think we’ll see a second crash as bad as the one in March, we could see further depreciation in the short term.
Despite falling share prices, there’s still ways to generate income and profits during this period.
Look for income
Even if the share price of a stock you own falls, you can still generate income via the dividend paid. This helps during periods when you may be holding a stock with a large unrealized loss. You don’t want to sell the stock and realize that loss, so you keep holding it. During this period, if the dividends continue to be paid, you’re in a stronger position. The stock is still making you money via the income from the dividend. Not only is this a good income stream in a falling market, but it also helps to offset the loss from the share price during the stock market crash period.
For example, let’s say you invested £1,000 in a stock with a 5% dividend yield. One year later, you’ve received £50 in income. If at this point the share price had fallen 5%, you would lose £50 by selling it. Overall, you’re flat. This is a simple example but when you add up the income over several years, it can offset even a large loss from the share price.
Look for value
Another way to make money when the stock market is crashing is buying in at a lower price. Let’s say you thought a stock was good value at 100p. After a slump, it now trades at 80p. Buying in using additional funds here could be a good long-term value investment. During periods when the stock market crashes, there’s often a disconnect between the fundamental value of a stock and the market value. This is because investors at this time are driven mostly be fear. So buying a stock again at a price deemed to be good value can help you to make money. Once the market settles down and investors realize the true value of the stock, the price should rally back.
This ties in with a final way to be profitable even with falling prices. Using the above example, if you bought a stock at 100p and again at 80p, your average price would be 90p. So buying on the way down can help to lower your overall average buying price. The bonus here is that you only need a smaller move back higher after the stock market crash to break even.
Don’t fear the stock market crash
Even if we see a deep correction of 10%–20% in the stock market, this isn’t something to be overly worried about. Remember that investing is for the long term. For the short term, the above pointers can hopefully help navigate the storm.
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jonathansmith1 has no position in any of the shares mentioned. 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.