It is natural whenever the economy is hit by recession it becomes a worrying time for the investors who have invested their money in the market. Recession in the economy not only hit the stock market but also leads to increased unemployment, a decrease in output, lower-income, and wages, low private investments, and less economic opportunity.
How the Stock Market Is Affected Due To Recession
During the time of recession, there is a decline in the economic activities and performances like the GDP (gross domestic production). Struggling with small and larger business leads to low valuation. Earnings are downgraded and the companies are under pressure to sell assets that are not essential for the business operations to maintain their balance sheet.
The businesses start cutting costs in research and development (R&D) and manufacturing. They show less willingness in investing in the long term and postpone the launch of new products in the market. During the time of recession, the stock market becomes unattractive for investors and the investors start deploying their money in gold, pulls their money out of the market, or transfer their investments overseas.
In the 2008 crisis, much eminent banking and automotive industries received bailouts (extending financial support to the company) of hundreds of billions.
Many market experts declared that the year 2020 will going to face the worst recession due to an outbreak of coronavirus. The pandemic had left many investors in ambiguity. In February BSE listed firms declined to Rs. 146.87 lakh crore.
Trading in Recession
Generally, the stock market decline in value during the time of recession due to a weaker business environment in the country. Investors who are looking forward to taking risks in such time should consider defensive stocks that remain healthy in the time of recession.
When the economies are entering into recession the businesses faces low cash flows and excessive debt. So the investors need to look for a company with good cash flow and low debt. And the investors need to see that which stocks are exposed to what and then move their money accordingly. If a company is involved in the domestic market as compared to the international market, then it means the company is more exposed to recession in the home country.
The investor can also look for companies which are investing and spending on new products and marketing during the time of recession. This can be a good option for investing because these companies are capturing the market with their new products when its competitors are struggling in the market. When the recession ends these companies may tend to reach the top in the market.
Ways to Make Money During a Recession Stock Market
- Invest in shares of good running businesses that are gaining profits, getting good returns, low debt, and have franchise value (FV refers to the brand value and its popularity among consumers).
- As an investor, you should always have a backup plan or backup income sources. This will help in cutting the risk of running out of money in the time of recession.
- Look for investment in the companies that are maintaining good balance sheets and have a good business model despite the economy is going through a recession.
- The safest place to invest is in the companies producing consumer staples or essential products because the consumer tends to buy essential products even if the economy is falling.
- Investing in one sector sometimes results in a loss in a time of recession. Diversification while investing is very important when a particular company or industry gets hammered.
Best Industries to Invest In Recession
1. Static Industries
Static industries are those industries that are affected in the recession time and remain unchanged, steady, and stable.
2. Service and Repair Industries
Service and repair industries run even if the economy is going through a recession. These industries flourish because service and repair are a day to day needs of the consumers.
Electricity supply, gas supply, telecommunication, etc. will continue to be essential for the consumers. So, it will be safe to invest in the industries engaged in providing these utilities.
4. Health Care Industries
Health care industries are those industries that will perform well in any situation. Again the health care sector is very essential in any country and it will never stop working. In this covid-19 pandemic, the health care sector is flourishing so well.
5. Essential Commodities
Non-essential commodities, clothing, entertainment sector like cinema halls hit in the recession time. As we saw cinema halls were closed due to the covid-19 pandemic and even the online shopping services were also closed. But on the other hand, industries engaged in essential commodities like food, personal hygiene, cleaning products, etc. were running their businesses so it can be a good option for investment.
A recession can be an extremely difficult situation, but if you are updated, smart, and prepared, you can easily survive this situation. Put these above points in use and minimize your risk of losing your money in the market.