How To Survive A Bear Market

No doubt you have heard people talk about bull markets and bear markets before. For those who don’t know what the terms mean: A bear market is nothing else but a continuous and sustained drop in the price of a wide selection of stocks over a period of time. Usually a market has to remain in a declining phase for at least two months and drop by at least 20% before described as a “bear”.

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.

You shouldn’t get confuse a declining market and a normal market correction. A market correction happens after a sudden increase in the price level when people sell their stocks to take profit. It normally doesn’t last more than a few days.

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.

Another possibility is to sell stocks short. What you in effect do is to borrow stocks from a brokerage and sell them to a third party at the current high price. Once the price has dropped, you buy them back and refund the brokerage. You should only do this with stocks which are virtually sure to drop in price.

Another route open to you is to buy what is referred to as “put options” in the industry. These increase in value during a bear market when the price of the underlying share drops. Once again you have to be right about the fact that the price is going to drop, otherwise you will lose the funds you paid for the put option.

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