How To Navigate A Bear Market
Wednesday, 14 July 2010 07:21 | 
Written by Michael Swanson |
You have no doubt heard the terms 'bear market' and 'bull market' before. What do they actually mean? A bear market is when there is a widespread and sustained drop in the prices of stocks over a period of time - Normally considered to be at least a twenty percent drop over a period of two months. As people get scared and sell their shares, it serves to push down prices even further.
You have no doubt heard the terms 'bear market' and 'bull market' before. What do they actually mean? A bear market is when there is a widespread and sustained drop in the prices of stocks over a period of time - Normally considered to be at least a twenty percent drop over a period of two months. As people get scared and sell their shares, it serves to push down prices even further.
A bull market, on the other hand, is therefore a prolonged, widespread increase in the prices of stocks. Just as the pessimism of a declining market pushes it lower, the optimism that drives a bull market tends to push prices even higher.
Do not confuse the terms 'bear market' and 'market correction'. A market correction happens regularly and is simply a small downward movement in prices after a sharp price increase. This happens when traders sell stocks to cash in on the profits they made during the increase in prices.
It's easy to see how one can make money in a bull market. In fact, it's hard not to make money in such a market. But how can you make money in a declining market?
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.
You have no doubt heard the terms 'bear market' and 'bull market' before. What do they actually mean? A bear market is when there is a widespread and sustained drop in the prices of stocks over a period of time - Normally considered to be at least a twenty percent drop over a period of two months. As people get scared and sell their shares, it serves to push down prices even further.
A bull market, on the other hand, is therefore a prolonged, widespread increase in the prices of stocks. Just as the pessimism of a declining market pushes it lower, the optimism that drives a bull market tends to push prices even higher.
Do not confuse the terms 'bear market' and 'market correction'. A market correction happens regularly and is simply a small downward movement in prices after a sharp price increase. This happens when traders sell stocks to cash in on the profits they made during the increase in prices.
It's easy to see how one can make money in a bull market. In fact, it's hard not to make money in such a market. But how can you make money in a declining market?
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.