When a stock's price declines substantially, you might wonder what you should do. If you own the stock, should you sell before the stock declines more or purchase more shares at the lower price? If you are interested in the stock, should you purchase now or stay away from it? Before you decide, you need to assess the cause of the price decline. Typically, the stock's price is reacting to one of three things:

• Market trends - When the overall market is weak, individual stock prices can also be affected. Compare the performance of a stock to the overall market to see if it is moving in line with the overall market. Some stocks may move to a greater extent than the overall market, while others may move to a lesser extent. Review the beta of the stock when making this comparison. Beta, which can be found in a number of published services, is a statistical measure of how stock market movements have historically impacted a stock's price. If a stock's price is just reacting to overall market conditions, you probably don't want to sell for this reason. Whether you should purchase the stock will depend on your assessment of the future direction of the stock market.
• Industry factors - A stock's price can also be affected by industry-wide factors. Those factors could include the cyclical nature of the industry's sales, a structural change in the industry, a change in government regulation, industry liability issues, and competitor announcements. With these types of changes, you need to assess whether the industry's changes are significant enough to cause you to sell the stock.
• Company-specific issues - These changes relate solely to the company in question and can include items like earnings, management, liability questions, government regulation, competition, and fraud. With these types of changes, you need to determine what is causing the stock price decline and then assess whether the change is temporary or permanent. For instance, an earnings shortfall might be a one-quarter event, or it could signal a fundamental shift in demand for the company's products. Reassess the company's fundamentals to make sure you still believe its future prospects are good, looking at things like the management team and trends in sales and net income. If, after making this assessment, you believe the change is temporary and has not affected the company's fundamentals, you probably will not want to sell the stock and may even want to add to your position.

Before you can decide whether you should sell your stock or buy additional shares, you need to assess what has caused the price change. You will then be in a better position to decide how to react.