Why does the stock fall immediately after I buy?

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May 21, 2021

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Strategic Alpha

Many people have the million-dollar question – Why does the stock fall immediately after I buy? There could be different reasons for the same. Let’s consider a situation when your analysis is correct and the stock falls immediately after you buy.  As an investor, you might buy when there is pessimism. But, this pessimism might grow for some time before the stock eventually turns.

Say you were an investor and believed the metals going into an upcycle in the next year. With that belief, you bought a basket of metal stocks that were representative of the Metals Index on March 1, 2020. Metals Index crashed by around 33% up to its low made on March 23, 2020. Now let’s see what happened in a little more than 1 year.

As we can see from the above chart, the Metals Index rose by around 165%. So, despite the fact that the Metals Index crashed by 33% in the first few days, it rose by 165% later. This resulted in a gain of around 78% from the date of your purchase. So, if you had held on to your conviction and trusted your analysis, you would have made decent gains despite a fall immediately after you bought.

Stock markets are driven by cycles. You might buy stock from an investment perspective when it is in a panic stage like in the above scenario. But, then it can still fall and move to the capitulation phase before eventually starting its upward journey.  

There can be other reasons why a stock falls immediately after you buy. This especially happens in cases where you buy a stock due to FOMO (Fear of Missing Out). When everyone including your friends and relatives is buying a stock, you jump in when the stock is too hot without carrying out proper research. As soon as you buy the hot stock, the stock price may go down as selling happens.

Another reason is that the market could be retreating immediately after you buy the stock. Let’s assume you bought a stock on 14 February 2020. Let’s see what happened to the market then?

As there was a huge crash in the market from mid-February, almost every stock that you bought in early February declined in the next 50 days. Thus, if you have bought a stock immediately before a market crash, it is bound to decline immediately after you have bought.

In certain cases, the sector from which you have bought a stock might decline even if the market as a whole has not declined. So, if you bought a stock belonging to a particular sector that immediately retreats, there is a very high chance that the stock you bought falls immediately after you buy. 

So, what do you do when the stock you buy falls immediately? Carry out an honest appraisal of what motivated you to buy the stock. If the stock pick was backed by good research and a sound method that you have developed, continue holding the stock. But, if you bought the stock without proper research merely due to FOMO, it’s best to exit the stock and cut your losses.

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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