Recessions can be a great time to invest in stocks, as prices tend to fall before and at the beginning of a recession. This presents an opportunity to buy top-tier companies at favorable prices. Some companies may be undervalued by the market, while others may have a business model that makes them more resilient to an economic downturn. It is important to note that there are no completely recession-proof stocks, and some investors take advantage of falling markets by short-selling stocks.
New investors may struggle to understand how the stock market works, but there are plenty of resources available to educate themselves. If you are interested in investing in individual stocks during a recession, you can look for options in sectors such as electricity, water and gas, renewable energy, and independent suppliers of electricity. However, it is important to consider that the minimum number of shares in an options contract is 100, and the cost of the premium can be a substantial percentage of the total cost of the stock. On the other hand, if GDP is falling, it is a sign that consumers and companies are struggling, and this leads to a fall in stock prices.
Instead of living at the whim of the stock market, consider diversifying into other assets such as treasury securities, money market funds, and certificates of deposit (CDs). One thing to consider when stock prices are low is to buy stock substitutes, options that have a lot of money, also known as LEAPS. These stocks, considered “defensive stocks”, may not be as attractive during boom periods as a bull market. All in all, recessions can be a great time to invest in stocks if you understand how the stock market works and have done your research on which companies are worth investing in.