Friday, January 11, 2008

What to do when the market corrects?

Since, the markets are choppy and most of the stocks in the mid-cap universe are correcting, the question at the top of the mind is, what can be done to protect our capital? Well, there are three approaches that can work and I am listing them here.

1. Sell - This is the simplest of the propositions, but one of the toughest things to do from a behavioral perspective. If you have stocks that are fundamentally weak and you had bought them to take short terms profits in it, then it is better to sell them, even if it means that you need to take a small(or large) loss. However, if you are convinced about the business and future prospects of the company, then corrections are good opportunities to buy into the stock.

2. Short Sell - Active traders can think of this approach. Sell the stocks you have in your DP and buy it back at a lower price. That way your net position on the stock is not changed but you make some money on the way down.

3. Buy Puts - Again, this is for high risk traders. They can profit from buying puts (or selling calls) in a bearish market.

So, you don't need to lose your sleep when the market corrects. Make money even if the market goes down.

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