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What Is A Bear Market? A Beginners Guide

What is a Bear Market and how to invest in it for profits

Last Updated on: 6th September 2023, 06:50 am

The stock market is among the oldest financial markets that exist today and channelizing the world economy. Businesses, companies, institutions, conglomerates, and government organizations, all draw money from the public for funding their projects and aspirations. They issue IPOs and other methods for fetching the money.  Even the bullish market is an appropriate time for reaping benefits. Moreover, it is a phase where people deposit and draw higher returns at the same time. The market is on a roll towards the horizon. On the contrary, the bear market eats on all the profits earned by investors. Unlike a bull, which is a symbol of strength and awakening energy, the bear is sluggish and dull. 

The bear market is a phase of the negative outcome of investment when the stock market falls more than 20 percent. It is a period that continues for a prolonged time. Experts generally advise to either stay away from the market or hedge during the same. 

Protection from the bearish market needs the application of strategies. If someone gets an idea of the market going bear, then it can turn advantageous for them. 

Ways to deal with a Bear Market

Before structuring a plan for dealing with the bearish nature of the stock market, investors and traders should know that it is an opportunity and not a scarecrow kind of a replica. When the market is down, even an individual with a lesser income or budget can think of investing. Most stocks are down. Besides, hedging is the best alternative for accumulating interests. 

For sustaining the time of downward momentum, traders can apply the cash-out approach by selling all stocks at once. However, it may cause some losses but would avert potentially heavy losses. 

Notably, such a haphazard way of bailing out should only be adopted if you are in dire need of finances and cannot afford to lose out on money. Else, if there is a protection of the delivery of stocks, one can wait for a while. Seeing the market through and reacting after it shows some improvement is wise. 

Additionally, it should not instill fear in the minds of traders. 

Apply put options:-

When stock markets are low, going defensive is akin to playing smart. It is a type of options trade where the user does not have the obligation but the right over assets. Hence, investors cannot sell them in the market before the expiry date of the contract or on the pre-determined price in the future. 

Diversify holdings:- 

It is the best time for the diversification of assets. You can pick different stocks, precisely the blue-chip ones at lower costs, and wait for them to boost for a period. Also, owing the mix of different assets is a guarding light because not all stocks from every stream witness a heavy fall irrespective of the bear market. 

During the bear markets, all stocks in an index plunge but not in equal amounts. Hence, a well-planned and diversified portfolio is a shrewd investment. 

If you can predict the winning and losing stocks in advance, then investments during the phase become easy and profitable. Economic recessions are the biggest reasons for bear markets and not just coincidences. 

It is advisable to get the stocks that offer steadier returns during the times. Adding the following portfolios can support investors:- 

Buy bonds:-

It is a lucrative investment when the stock market is down. The price of bonds moves in the opposite direction of stocks. Hence, when the market is bearish, then it is advisable to invest in them for better returns. It acts as an essential component for diversified portfolio holders. Additionally, short-term and high-quality bonds can ease your worry regarding the bear market besides earning you a great amount. 

Dividend stocks:-

Such stocks are the best resort when the market is in free-fall mode and not showing signs of rising. When prices of stock get stuck at a place throwing the resistance to move anywhere, then dividends make for a better return. Hence, companies that pay bigger dividends are always on the cards of investors during bear markets. 

Take a long Term Long

The stock market tends to return to normal after it goes bearish. Hence, if you have the capacity of holding or buying your stocks for a longer time, it is better. However, these periods are tough to endure and tough said than done, but showing a little patience can help you get over the difficult time. 

Also, if you have a retirement plan on your radar, then the phase of bear markets would get eclipsed easily. Additionally, history has it that whoever invested during these shallow and hollow times made remarkable profits later on. Moreover, short-term goals are susceptible to risks and cause losses. 

Sometimes, there is temptation and compulsion to exit from the market during such time, do it only when absolutely necessary. If you are into trouble handling your investments, then seek better brokers like PrimeFin. They can help you deliver stocks that are below the congenital value. 

These reputed brokers can ease the pressure caused by bearish markets through added features like charting and tools. 

Try dollar-cost averaging 

If the price of stock takes a free-fall, then it is also a chance for investors to average or hedge during the period. For example, if the cost of a stock is USD 150 and it loses USD 50 during the bearish mode of the market, then purchasing some of the shares at that slashed price and holding for a while can surge the profits. 

There’s no doubt that when the market turns to its full capacity, the margins get higher along with gains. The most sensible way during the bearish market is to add money with a strategy in place. 

Dollar-cost averaging means investing money in rough amounts but continuously during a set period in the stock market. The practice smoothens the purchase price as time moves. It also makes sure that a trader or investor does not end up investing all money at a time when the stock is hitting the pinnacle. 

When the market dips, it is the best plan to buy some stakes in blue-chip shares. They are fundamentally strong and do not cease to exhibit their magic when the bullish market takes over. 

So, if you think the other way round, there is a sheer opportuning peeking for investment and gains in the bear market instead of potential losses. 

Invest in Stocks that do better during a Slowdown 

Identifying the sectors that offer benefits when the market is going through a recession or a slowdown is a key to making money. If you wish to stabilize the portfolio owned by you, then check the stocks that either perform outstandingly during the phase or remain indifferent to the market. 

Daily utilities and consumer durables weather all types of markets. Even during the COVID-19 pandemic, staples (food and groceries) managed to develop a bigger market. Hence, investing in stocks supporting the market allow a chance to make a profit even during the adverse time. 

ETF (exchange-traded funds) and index funds help in tracking the benchmark of stocks and assist in suggesting the best time for investment. 

Investing through ETFs offer you the required exposure in these companies that stand vindictive and stable during these challenging times. Interestingly, an ETF or index fund has more diversification as these funds hold shares in sundry companies. 

What Triggers the Bear Market? 

The slow growth of the economy is directly related to the demand and supply game. Also, when there is some war-like situation or political instability in a country like the USA or UK, it sends a strong signal to investors across the globe, and it starts to project its effect. 

When the interest rate goes down, the wage gap starts widening, and inflation rises, then it is the call of recession. Based on these elements, you can judge the market is going a different route. 

There are closures of shops, businesses, and fundings due to a lack of confidence in investors. And when the governments and bigger conglomerates start to realize it, the market fall in the valley of such a bear market. 

The bearish market causes unemployment, loss of sales and purchasing parity, investment goes all-time low, and people look for safe havens. 

However, when compared, the bearish market does not last longer than the bullish one. If the bull runs 1,742 days, then the bear has an average of 363 days of sustainability. 

Statistically, the losses are not severe in the bearish market as per a report by Invesco, whereas in the bullish market, traders earn around 159 percent. 

Conclusion:

A bear market is a type of immunotherapy for market bearers and investors. If investors have a plan in place, then they can buy some of the greatest stocks at a meager rate. Anyone who displays patience and intelligence, then there would be gains instead of losses. Also, it has a shelf life. Hence good days are always ahead. 

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