No doubt you have heard people talk about bull markets and bear markets before. For those who don’t know what the terms mean: A bear market is nothing else but a continuous and sustained drop in the price of a wide selection of stocks over a period of time. Usually a market has to remain in a declining phase for at least two months and drop by at least 20% before described as a “bear”.
A bull market is exactly the opposite of a bear. Prices start rising and continue to rise with more than twenty percent for more than two months. Just as pessimism drives a market with dropping prices even further down, optimism drives a bull market upwards.
You shouldn’t get confuse a declining market and a normal market correction. A market correction happens after a sudden increase in the price level when people sell their stocks to take profit. It normally doesn’t last more than a few days.
It’s not difficult to understand how people make money in a bull market - it’s in fact difficult not to make money when prices go up all the time! How do traders make money while prices are dropping though?
One way to make money in a declining market is to accurately predict when it reaches its bottom and then invest in a selection of prime stock tips. You can use fundamental or technical indicators to try and predict the end of the drop in prices. This is very difficult to do, however. Even the experts often falter when it comes to correctly predicting the end of a slump in prices.
A further option you have is to sell stocks short. What happens in effect is that you borrow stocks from your brokerage and then sell them to another trader at the current (high) price. Once the negative market has taken its toll and the price of the stock is much lower, you buy it again and give back what you borrowed from the brokerage. It will of course only work if the market actually goes down.
You have one other possible course of action if you want to make money in a bear market: buy put options. This type of option actually rises in value as the price of the underlying share goes down. As with short selling stocks, if you are wrong about the market and it actually goes up, you will lose the money you paid for these put options.
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Tags: finance, investing, stock market