Stock markets have plunged to the lowest level since March over concerns about rising inflation and the health of the economy.
The squeeze on household finances caused the UK economy to shrink in April. This spooked investors, prompting a huge sell-off in stocks. So is now a bad time to buy shares, or are there opportunities to be had while others are fearful?
In this article we set out:
Related content: The best stocks and shares ISAs.
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Is now a good time to buy shares?
If the recent sell-off in the FTSE 100 is anything to go by, many investors don’t think it’s a good time to buy shares.
The FTSE, which measures the performance of the largest listed companies on the London Stock Exchange, plunged 7% between 8 June and 20 June.
But just because the stock markets are falling doesn’t means that it’s a bad time to buy shares. In fact, it could be an opportunity to bag some bargains.
But it all depends on what you buy: while the future of some companies look positive, the same can’t be said for all businesses.
It’s important to do your research into each company you want to invest in. Listed companies regularly release their financial results which can give you a picture of the health of the company.
Also bear in mind that some sectors tend to fare better than others depending on the external circumstances. For example, during the pandemic, technology companies tended to well while travel firms suffered.
Now that we are in a cost of living crisis, people have less spare cash to spend, meaning some businesses will suffer, particularly those luxury brands.
However, companies that are essential to our day-to-day lives are less likely to struggle, such as supermarkets, banks and manufacturers of consumer staples.
- Don’t buy shares in a company just because someone said you should (always do your own research first)
- Selecting and monitoring individual shares is time-consuming
- You can buy investment funds or use a robo-adviser so that an expert investor can select shares on your behalf
If you’re new to investing, you might want to read our beginners‘ guide to investing first.
Why has the stock market dropped?
Major stock markets have plunged in June over fears about surging inflation and the impact on the global economy.
Between 8 June and 20 June:
- The FTSE 100, which measures the performance of London-listed companies, dropped 7%
- Meanwhile, the S&P 500, which measures the performances of the largest US firms, fell 11%
The last major sell-off was in March over concerns about Russia’s invasion of Ukraine. The crisis has caused huge amounts of uncertainty as investors worry this will spill over into the businesses they are invested in. As a result, lots of investors sold their stocks.
With that said, it’s never a good idea to panic and sell stocks when the markets are falling because there is a danger that you could end up crystallising losses. We explain how to invest in volatile times later on in this article.
Also bear in mind that stock markets have been very volatile since the start of the pandemic.
While most restrictions in the UK have now been withdrawn, some markets continue to wobble because of concerns about new waves of coronavirus.
Is now a good time to invest?
Reasons to feel hopeful about the stock market:
- Successful booster vaccination roll-out has led to an increase in movement, trade and spending
- Industries that were hit by subsequent lockdowns, such as travel and entertainment, have reopened
- Takeovers will continue as investors and companies seek new opportunities
- Some sectors are booming: technology, e-commerce and biotech have thrived during the pandemic and will continue to grow
- Despite gradual increases, the UK’s national interest rate is still relatively low, which is encouraging people to spend or invest
Reasons to feel cautious about the stock market:
- The impact of the Ukraine crisis could hit global businesses
- Some nationals are still fearful over new strains of the coronavirus
- Rising inflation will weigh heavily, meaning people have less money in their pockets
- Disruption caused by the global energy crisis may continue for some time
- Brexit is still affecting supply chains
- Central banks are unwinding pandemic support measures
Crashes can come out of the blue and their causes only become apparent with hindsight.
Find out more about how to invest during a recession.
When will the next stock market crash happen?
A stock market crash is a sudden and significant drop in the value of stocks.
Some stock market speculators panic and sell their shares fearing that if the price falls further, they could lose even more of the money they invested.
No one can accurately predict whether or not the stock market is going to crash. All you can do is evaluate which factors will influence the stock market and your particular investments.
Bear in mind that when stocks rise rapidly, there is always a danger that they could fall just as quickly.
The FTSE 100 share price, which measures the performance of the largest listed British companies, had been reaching fresh highs before plunging on news that Russia was invading Ukraine.
It has been a wobbly ride since February 2022 with markets falling again in June.
“Research has routinely shown that time in the market is more successful than timing the market so I would caution investors against trying to pre-empt any potential falls.”
Claire Walsh, independent financial expert
You might want to read more in our article how to buy shares.
Despite optimal conditions during the pandemic Deliveroo has failed to deliver
Eight things to consider before buying stocks
Here are eight things to consider:
Equities can be very volatile when there is uncertainty and could pull back a lot if new variants of COVID are discovered that evade the vaccines.
2. Context is everything
Just because something is not cheap it does not make it unattractive.
Interest rates have risen but they are still very low. In this environment, businesses in growing markets with access to cheap money tend to do well and what you pay now may look cheap in ten years.
3. Not all equities are the same
Some shares are in fact expensive because they are over-hyped. This means they might fade away over the next few years.
4. Are you happy going against the crowd?
Investing when people are fearful is understandably daunting, particularly when there is so much uncertainty in the world.
But consider whether you believe will be in a better situation by the time you will want the money. Things can always get worse before they get better.
5. Investing is for the long-term
Remember a “loss” is only a loss when you sell the investments. Your decision depends on how quickly you’d need the money and whether you understand that shares can fall as well as rise.
Can you stomach losing money should markets continue to fall?
With interest rates still low at 0.75%, a savings account won’t help your money grow.
When you allow for inflation, which measures the rising cost of living and is currently at 7%, you’re almost guaranteed to be worse off.
Investing gives your money the best chance of growing.
7. Use a stocks and shares ISA
It’s a good idea to hold your shares in an ISA to protect your earnings from dividend tax and capital gains tax.
We explain: How are shares taxed?
8. Buy a pool of shares
If you would rather invest in a basket of shares rather than choosing them yourself, you could invest in a fund.
Some funds simply track a stock market like the S&P 500, which is an index measuring the biggest companies in the United States.
Fintech, renewable energy, gaming and leisure are stock market sectors worth keeping an eye on
Why should you drip feed?
If you are thinking what shares to buy now, remember it is almost impossible to time the market perfectly to make the most of your money.
- Invest when markets are rising, you may have missed the boat for the best returns
- Invest when the markets falling, and they could fall a lot further still
Drip feeding your money in slowly, rather than investing it all in as one lump sum, removes this tricky decision.
This not only encourages a good savings habit. It smooths the investment journey by buying more units when markets are lower (known as pound cost-averaging)
How do you get dividends?
Dividends are what a company pays to shareholders when it makes a profit.
The pandemic has affected the cash position and growth of a number of businesses, which has impacted on the amount shareholders have received in dividends.
Throughout 2020 the UK’s biggest banks all suspended dividend payments and share buybacks. These included RBS, Barclays, Santander, HSBC, Lloyds, and Standard Chartered
Dividend-paying stocks are often a popular choice to include in your investment portfolio. But remember, the dividends you earn might be subject to tax.
Four tips for investing during uncertain times
Here are our four golden rules when it comes to investing during a financial crisis:
- Stay calm: the pandemic, the war in Ukraine and the cost of living crisis have stirred up a lot of emotions, but stay rational about your investments.
- Consider your aims: investing is personal. You choices depend on your circumstances, objectives, needs and risk tolerance.
- Make the most of tax relief: you can invest tax-free with an ISA. You can also get an instant uplift with a pension and a Lifetime ISA, as the government will add extra cash whenever you pay in more money.
- Drip-feed your money: if the markets go down further you’re buying at a cheaper level and it could help smooth out your returns, with the hope they recover and grow in the longer term.
Best sectors to invest in
Making the most of a buying opportunity often means looking for firms that are well placed for any potential structural shifts.
Here are some sectors that are worth paying attention to:
- Fintech: companies that help people work remotely or pay for goods or services are worth investigating.
- Ecommerce: the pandemic has boosted online shopping as people continue to stay away from crowded malls and supermarkets.
- Renewable energy: a rapid fall in the cost of building renewable energy projects has happened at the same time as a greater awareness of the climate crisis. These assets provide reliable income streams, which are often backed by government subsidies. Read more in our guide to ethical investing.
- Online gaming: these businesses were among the most resistant to the Covid-19 stock market sell-off.
- Commodities: this includes precious metals such as gold and silver which are often seen as “safe” assets to hold during market turmoil (though remember all investments come with a degree of risk).
- Banks: the banks could be worth watching. Remember, banks have been through the 2008 financial crisis and may therefore fare better in an economic recovery than markets anticipate.
- Leisure sector: after months of isolation, people want to go out and spend. Restaurants and pubs with the strongest balance sheets might fare very well as they might have the opportunity to pick up cheap distressed assets from rivals that went bust.
How to pick stocks
If you’re planning on doing some stock-picking yourself, here are some top tips:
- Do your research: make sure you understand the financial health of the company by reading reports
- Also do your research on the prospects for the sector as a whole: are there any sector-wide problems that are holding back some businesses? Could regulation change the fate of the sector?
- Compare a company to rivals: does it have scope to compete with competitors?
- Avoid being emotional about investment decisions: this is often when mistakes are made either through rushing into buying a stock or panic-selling
- Make sure you’re not overly invested in one sector: buying across a range of sectors means that if one struggles hopefully another will thrive
Should you buy cheap British stocks?
One of the world’s biggest investment banks JP Morgan was telling investors to buy British stocks now while they are cheap.
The investment firm had taken a bearish stance on British stocks since the EU referendum in June 2016. When compared to companies in the US and Europe, UK shares have underperformed since the Brexit vote.
But JP Morgan has said there are a few things that could change the fortunes of British stocks:
- UK shares have strong dividends
- Stock markets like the US and China are expected to struggle maintain their momentum going forward, paving the way for the UK to outperform
- UK stocks have tended to rise in the months after an interest rate rise.
If you’re looking to buy stocks, you might want to open an investment ISA. Here we round up the best stocks and shares ISAs.
Best place to invest money without risk
It’s impossible to invest without taking some risk with your money. This is because the nature of investment means you need to take on some level of risk in order to get a return.
The higher the level of risk, the higher the potential for returns — and also the greater potential for your investment to fall too.
But there are ways to reduce the level of risk you are taking on. This includes:
- Buying less risky assets such as bonds rather than shares
- Making sure you are spreading your investments across types of assets, companies, sectors and countries so that if one investment falls, hopefully another will thrive
- If you are invested in a ready-made portfolio, you could select a “cautious” risk level
We outline the best ready-made stocks and shares ISAs.
Should I sell my stocks?
In June 2022 there was a huge sell-off across the major stock markets, causing prices to plunge.
Should you do the same and sell your stocks? It all depends on your reasons for wanting to sell.
Here are some things you should think about before selling:
- Are you panic selling? It’s never a good idea to panic when it comes to investments. Keep a clear head and wait for the storm to pass.
- If you sold your stocks now, would you be making a loss? If you sell you could end up crystallising losses which you could regret if the stock market later recovers.
- Successful investors tend to buy when others are fearful because they can bag a bargain: so should you actually buy more stocks rather than sell them?
- Remember why you invested in the first place: is the company still a good business that has potential to improve? Unless the prospects for the company or the sector have changed radically then it might be a good idea to hold on for now.
When will stocks recover?
Major stock markets have had a tumultuous time in June 2022 due to concerns about rising inflation and interest rates.
So when will the stock markets recover? This is an impossible question to answer because no one has a crystal ball to see in to the future.
However, it’s thought that inflation could continue to rise throughout the year; the Bank of England expects the consumer prices index to exceed 11% in October.
This means people could continue to tone down their investment risk and will have less money to spend on buying stocks.
In other words, stock markets could be volatile for some time, so if you’re buying shares now you could be waiting several months (or even years) for a recovery. Only time will tell.