How to Trade in a Bear Market
Turning downers upside down.
It’s a jungle out there on Wall Street. Or at the very least, a zoo. There are bulls and bears fighting to control the direction of the markets. One of them is always in charge and the other is waiting just around the corner to make the next move.
How do you know when the bears have the power and what can you do to profit from it?
The Bear Market
Think of a bear market as being a real downer in terms of prices and attitudes. In a bear market trading operates under a cloud of pessimism. Investors react to falling prices by selling, and that causes prices to continue falling. Many people consider it to be bear territory when multiple indexes decline by 20% and stay there for two months or more.
The most famous bear market in history is also known as the Great Depression of the 1930's. When bear markets arrive they are usually accompanied by other financial negatives like recession, unemployment and inflation. Bear markets are filled with negativity.
Bear markets are the polar opposites of bull markets, which are fuelled by investor confidence, optimism and rising prices. Historically, the terminology of a bear market dates back to a time when traders sold bearskins before the bears were actually caught. Now markets and investors are described as bearish if they are certain that prices are going to go down.
Most analysts believe the last bear market began in 2007 and ended in March 2009 when the tide turned.
What’s a Correction?
Bear markets shouldn’t be confused with corrections. Corrections are short-term trends in the markets that last less than two months. During market corrections prices can dip as low as 20%, but they won’t stay low like they would in a bear market.
Can You Profit from Falling Prices?
Making a profit in a bear market while others are selling can be tricky since the question is always whether the bottom’s been hit or not. Timing the market is something that challenges even the smart money.
The Long Haul
- If you’re buying securities to hold for a long time, jumping in when the bears are in charge can be a successful strategy, since historically, the markets shall rise again. This means doing your homework, of course. Will the company you’re buying low grow enough to earn you a profit when you’re ready to sell?
Old Reliables
- Many consider blue-chip stocks to be solid investments during a bear market because of their track records.
Stay Small
- —There’s another school of thought that says small-cap stocks, stocks with lower market caps, are the way to go during a bear market because they have more room to grow when things turn around.
Risky Business
- Short sellers, or investors who borrow a security and then sell it anticipating a drop in price, can make money during a bear market. But that is not a strategy for the novice investor.
Be Contrary
- The financial experts at BearMarketCentral.com believe that because markets go up and down, it is possible to survive and profit from the downturns. The philosophy there is that a bear market has been unfolding since 2000 and investors with the right mix of investments will profit.
That’s Correct
- A safer and more often recommended strategy is to buy during a correction. A correction can be a great time for an investor to pick up securities at value prices that are likely to rise again in the near future.
No one likes to see the value of his or her investments drop when the bears are running the market.
Financial experts say it’s important to remain calm and not make rash decisions when prices slide.
Savvy investors already have a portfolio that includes a mix of stocks, bonds and securities that are only as risky as that particular investor can tolerate. And that kind of strategy can tolerate the ups and the downs on Wall Street.
This article was originally posted on WallStreetSurvivor.com, the world’s most popular stock market simulator. The WSS team is on a mission to demystify the world of investing through interactive and easy-to-understand courses.
