What Happens to Your Money When the Stock Market Crashes?

Author: Finscreener

Estimated read time: 3 minutes

Publication date: 22nd Mar 2021 12:12 GMT+1

An equity market crash is a harsh truth that is inevitable. The stock markets generally mirror the country’s economy. As we know, every economy goes through peaks and troughs which is reflected in the volatile movements of a stock market.

But it doesn’t mean you cannot prepare for a market crash. You can survive market volatility by allocating capital towards solid investments.


You don’t lose money unless you sell

Most people equate market crashes with losing money. However, what happens with your savings is much more complex. In a stock market crash, prices of various stocks across sectors experience a sharp decline. As investors start selling their shares at the same time, stock prices take a deep plunge.

When share prices decline, you will also see a fall in the value of your portfolio. For example, if you bought 1,000 shares of a stock for $10 per share, your investment will be worth $10,000. Now if the stock price falls to $5, your portfolio will depreciate by 50% and will now be worth just $5,000.

Now, an important aspect to remember is that this loss is not permanent unless you sell your investments. If you hold your stocks and the equity market recovers, the stock price may bounce back to its original price of $10 per share and may even move higher to touch record highs.


Amazon’s wild swings

Amazon (NASDAQ: AMZN) stock began trading at $1.73 per share back in 1997. It soared to $90 per share by October 1999. However, soon after the dot-com bubble burst, AMZN stock fell to $7.5 in October 2001. Shares then recovered to trade close to $90 in December 2007. But, the financial crisis of 2008-09 meant the stock again fell to $50 by December 2008.

It crossed the $90 mark only in October 2009 and has since been one of the top-performing stocks on the NASDAQ. We can see an investor who bought Amazon shares at the height of the dot-com bubble would have had to wait 10 years to recover his investment.

One of the best things you can do to get through a stock market crash is to invest in companies with strong fundamentals and hold onto your investment for as long as you can. Even if the stock price falls significantly, strong companies will be able to pull through.

By holding onto these investments until they recover, you can avoid losing money permanently. It's also advisable to diversify your portfolio and mitigate investing risk. You need to identify 10 to 15 different stocks across sectors. So, in case a couple of industries don’t bounce back after a crash, it won't tank your entire portfolio.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.