Take Advantage Of A Bear Market

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 is just the opposite: A prolonged, widespread rise in the price of a large number of stocks. While the pessimism behind a market with declining prices drives it even further down, the optimism underlying a bull market drives the prices to even higher levels.

A bear market should not be confused with a simple market correction. Market corrections happen regularly and usually do not last more than a day or two.

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.

Of course you always have the option to sell stocks short. This is rather less complicated than it sounds: all that happens is that you borrow a certain number of stocks from a brokerage at the (high) price of today and sell it to a third party at the same price. If you were right and the market actually drops, you then buy the same shares at the new low price and return them to the broker.

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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