Buying Stocks During a Recession
During a recession, when consumer spending dips and businesses cut back on employees, the stock market generally follows suit, with stocks of all but the most resilient companies heading south. While this can be a time of great pain for investors, it can also be one of opportunity. When the recession is over, many blue-chip firms will return to their normal strength. For this reason, investors with the resources to purchase stocks during a recession can snap up shares in solid companies at bargain basement prices.
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Instructions
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Identify the recession's causes. Before buying stocks in a recession, investors should know what triggered the recession. This will usually give a hint as to which companies will return to profitability and which are lost forever. For example, in the U.S. recession that began in 2008, many mortgage lenders that issued unsound home loans--a principal cause of the recession--went bankrupt.
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Find sectors that are likely to rebound. Although some sectors of industry are directly effected by the causes of the recession, others are the victims of an economy-wide slowdown. Having suffered no lasting damage, these sectors should return to normal business when the economy rebounds. This is true of many manufacturers of consumer goods.
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Pick out companies with particularly strong business models. Some companies will be so badly wounded by the slowdown that they won't be able to come back. However, those with sound business models have the best chance of surviving the downturn. Read prospectuses, company reports, analyst write-ups and quarterly releases for information about individual companies.
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Examine stock price histories. After you've identified a handful of prospective companies, look at their stock price histories. Ideally, these companies should have demonstrated long periods of steady growth, interrupted only by recessions and other temporary slowdowns. Avoid companies whose price is erratic or volatile.
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Buy stocks in the most consistent earners. Those companies that managed to continue to earn profits quarter after quarter for a number of years before the recession hit are the ones that can be most expected to return to their old ways when it ends.
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Hold the stocks until prices return to their old levels. A recession may last several months or it may last several years. Even after the recession is officially over, it may take some time for stocks to return to their former levels. For this reason, stocks purchased during a recession are considered a long-term investment.
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