Bear Market: What is it? How do you deal with it?
A stock market is a market which is open to the public and its sole purpose of existence is to issue, buy or sell the stocks that get traded over the stock exchange. A stock belongs to a company and when a person buys certain number of stocks; they own that much percentage of the company. Stock market has existed for a long time now and it either crashes, rises or falls. Different parties involved in the trade benefit from different aspects of the stock market and the others face losses.
A bear market, similarly is benefitted when the prices in the market experience a prolonged decline. The investors who have a pessimistic approach towards the market and expect the prices to decline in the short term are called as bears.
A bear position represents a short position that is taken on the financial security. Due to this the investors expect the drop in prices.
For a common investor or our readers, the effect of a market going bearish or bullish always causes drastic effects. People who purchase stock lose money and losses discourage people from investing more money. The risk factors are high and hence here are a few tips to cope and handle the ups and downs but mostly downs of the stock market; The bearish market.
In a bearish market the bears rule and the bulls don’t stand a chance. The stocks of both good and bad companies go down nearly by 20%. In such scenarios one must invest in good companies because the stock of poorly performing companies tends to stay down but good companies rise up as soon as the bearish period is over. A clear rule of any investor is that as soon as the stock of a good company falls; buy it out before anyone else does.
You must look out for dividends. This method completely avoids the status of the company’s performance in the stock market. If the stock price for the company drops due to selling but the company stays strong then it will continue paying the dividends and you will continue earning your share of profits.
Bear markets tend to be tough for stocks that are performing good but it’s much worse for stocks that perform worse. When the stocks of a poorly performing company fall down and tend to keep falling it gives us an opportunity to profit in their downfall. Many people short the stocks of such companies and profit from it when it continues to plunge further. This however is a very risky method because if the stocks go up and don’t continue the falling trend you might be subjected to unlimited losses.
If you have an aggressive strategy and your purchase and selling patterns tend to lift up the market prices, you must immediately shift your strategy and go for a more defensive approach. This will help you maintain a position in the market and survive the bearish market. A common sense that applies is irrespective of the conditions in the market, people will need food and other basic commodities which are classified as needs to survive and companies which deal in such sectors tend to have a promising future to rise and prosper again. Investing here is a sensible option and holds good returns.
You must diversify your portfolio and hence you must invest in other forms of finance which is unrelated to stock market. This is a precaution rather than a coping mechanism but it proves to be helpful in the long run, because when the stocks crash, we can benefit from the rise in the value of the bonds.
One must avoid any hasty decisions When a person sees the market drop it tempts one to jump out until the values of assets start to climb up again. This approach is not advisable because it can cost you a great deal. By selling when a market seems to be fallen will risk you in getting locked in a permanent loss of capital.
Another method to cope with a bear market is to reallocate all your funds and capital. Sell off all your investments and start holding of cash or reinvest all the capital into a safer and simpler option. This method has its own drawbacks. For example, if all investments are sold one can miss out on rebound and lose all the gains which will be exponential in nature.