When the investors don’t have hope in stocks and start to sell, the stock price will drop more and more
By Guy Avtalyon
The bear market is a period of consistently falling stock prices. Usually, a bear market is defined by a 20% or bigger drop in stock prices lengthening over a time frame of two months or longer.
The variation in prices is measured using the movements of a major stock index. For example, the Dow Jones Industrial Average or Standard & Poor 500 Index.
A bear market is distinct from a correction. Correction occurs when stock prices drop by 10 percent over a shorter time frame, usually less than two months. The average bear market lasts 1.4 years. The average cumulative loss is 41% during that period.
A bear market is when the prices of stocks or bonds are falling. In fact, a bear market could describe any market if the prices are decreasing.
The term is typically used in relating to the stock market, but it can also describe specific sectors such as real estate, bond or foreign exchange.
A bull market, on the other hand, is the opposite. In a bull market, the price trend is upwards.
Bear markets are cruel when they ran. The experience of any stock investor who was invested in stocks during 1973–1975, 2000–2002, or 2008, shows that.
Luckily, bear markets tend to be much shorter than bull markets. Also, if you’re well-diversified, you can get through without much loss.
For clever investors, bear markets can provide opportunities to boost the portfolio. Also, it is a good time to lay the groundwork for more long-term wealth-building. We will talk about this later.
Examples of a Bear market
A famous example of a bearish market is the recession that followed the great Wall Street stock market crash of 1929.
The investors were massively fighting to get out of the market. They tried to avoid extreme losses and kept on selling their stocks. Hence, they caused a further drop in the market.
The market collapsed on October 29, 1929. Then came depression in the economy, known as the Great Depression.
In fact, the Dow Jones Industrial Average declined by 89% through 1932. Then came the housing bubble of 2006. Real estate prices skyrocketed by more than 100% due to speculative borrowing. The consumers could get a mortgage to buy a new house. Moreover, more and more people were into the real estate investment spiral. Their plan was to make a profit from purchasing rental properties and selling them later.
These two circumstances boosted housing demand, but real estate prices too.
What happens in a Bear market
Bear markets mean low investor’s trust and huge pessimism.
The investors continue to lose hope in stocks. They begin to sell securities in order to protect their investments from potential losses. This movement can trigger further declines in stock prices.
Then you have speculators on the scene.
They come back into the market to capitalize on lower prices, which is good. Because, if stocks begin to gain impulse through reinvestment, a bear market can turn into a bull market.
What triggers a Bear market
Well, it can be triggered by plenty of factors. For example, the main economic transformations, such as fluctuations in oil prices, can influence the evolution of a bear market. Volatility in foreign markets or political disagreements on a global level may also cause the movements in the market.
For investors, the primary attention in a bear market is how to minimize losses. To achieve this, many investors may try to turn the market when buying and selling.
But that’s a wrong dance at best.
The end of the bear market is generally when stock prices move upward again by 20% or more.
How to profit in the Bear market
In a bear market, the stocks of both great and poor companies go down. But poor stocks tend to stay down, while great stocks recover and grow again.
The strategy for investors is easy. If the stock of a valuable company goes down, that is buying opportunity.
Good material is on sale!
Thanks to the bear market you can reveal a great stock at a bargain price.
Also, if during the bear market, stock price drops, but the company is powerful, still has a profit and still pays the dividend, you might be sure such a company is a good buying opportunity.
If you see a stock whose company has a bond rating of AAA, that may be a good buy in the time of the bear market!
Bear markets may be hard for good stocks. But to be honest, they’re brutal to bad stocks.
When a bad stock goes down, it often goes into a more drastic decline as more and more investors look into it. Many investors would short the stock and profit when it continues falling.
Going short is a risky way to bet. Why?
If you’re wrong and the stock goes up, you may have unlimited losses. A better way is to consider buying long-dated put options.
That may give you the profit if you’re right and the stock falls. But, at the same time, it limits your losses if you’re wrong.
Is margin trading useful?
Use margin wisely, and you will have a powerful tool in the bear market.
Using margin to gain dividend-paying stocks after they’ve corrected is an excellent tactic.
But, keep in mind that when you employ margin, you do add an element of speculation to the mix.
For example, if you buy 100 shares of a dividend-paying stock with 100% of your own money means you made a great investment. But if you buy the same stock with margin the risk is added.
You wouldn’t like to use margin before the stock corrected or declined. Remember, the brokerage firm wants you to have enough “stock collateral”.
Say, you use margin when the stock is high and it later falls!
Well, it can be dangerous, indeed.
But if you use margin to buy the stock after a notable fall is much less risky.
The best tips
You can profit in the bear market also if you buy a call option, for example.
But it is about speculating, not investing. The call option is a derivative, and it has a finite shelf life. If you’re not careful it can expire worthlessly.
The good side of a call option, it is cheap to buy and it is a very cheap vehicle in a bear market. This means if the stock price dropped but the company is in good health, betting on a rebound for the company’s stock can be profitable.
Also, you can write a covered call option.
That means you accept an obligation to sell your stock to the buyer of the call that you wrote at a specified price if the stock rises and meets or exceeds the strike price. As a return, you receive income.
Where is the benefit?
If the stock doesn’t increase to the option’s specified price during the life of the option, you can keep both your stock and the income from writing the call option.
Writing covered call options is an almost safe way to boost the yield on your stock position by up to 5%, or even more.
The catch here is that you may sacrifice the opportunity to make gains above that specified price.
But if you did right, a covered call option can be a practically risk-free strategy.
Bear market cost investors money because security prices generally fall. It doesn’t always give advance notice of its arrival. But bear markets don’t last forever.
You must know when to buy and when to sell to maximize your profits. Many investors try to “time the market,” or estimate when a bear market has begun and when it is possible to end up.
The technical analysis is specially engaged in this work. You have to be patient. Just keep watching the company’s vital statistics. If the company looks good, then keep collecting your dividend.
Don’t waste your money!