How to Make Money in A Bearish Market
The financial market is characterized by periods of highs and lows. In a low period dropping stock prices is the norm which many traders consider unfavorable. Such a market condition is referred to as the bearish run. The term bear market describes a situation in which prices of the securities drop at a 20% rate or more from their previous standings.
For most traders, this is a time to put their tools on hold and wait for the market to stabilize with the prices appreciating. However, if you are a proficient trader, then this is just another opportunity for you to emerge from the market with decent gains. Below are some of the ways you can make money is such a market condition.
Short selling is a strategy that many experienced traders take on when the market is dwindling with stock prices falling. It is a risky speculative trading affair that for you to gain you need to be sure that the prices will continue to dip.
As a trader, going short means you borrow some assets from your broker or lender. This is akin to taking a loan from the broker. You then sell the assets to an interested party in the hope that the prices of the asset will fall. Then before the lending period ends, you buy back the assets at a decreased price and take them back to the lender.
In this case, you also need to account for trading fees such as commissions.
In explaining this concept, you borrow 100 shares from a company priced at $8 each, the total cost is $800. You sell these shares to an interested party at the current market price of $800 for the whole of them. Market prices drop as planned and the shares are now priced at $6 each meaning the whole batch sells at $600. You buy at this price and take the assets back to the lender. Without commissions and other trading fees, the difference between the initial and final is $200 which stands as your gain.
Spread betting is a concept that is so much alike to Forex trading where you speculate on the price movement of assets without necessarily owning them. Just as the name indicates it is betting on the financial markets. In the case of spread betting, you can speculate on a sustained downward trend and stand to gain from it.
For example, if certain stocks stand at the price of $250 with speculation of a dip at the end of the trading period. You, therefore, bet on it with commit per point of $20. This committed amount is like your investment. The speculation goes as expected and the closing price stands at $230 for the stocks. Here, your earning will be (250-230)*20, where you earn $400 from the stint.
Invest For The Long Term
The striking characteristic of the bearish market is that stock prices depreciate. One thing you need to keep in mind is that the financial market is volatile and the prices won’t remain as such forever. Eventually, they will improve. Most bearish market runs take roughly two months at most to regain stability.
With this knowledge, you can make long term investment deals by engaging in a stock purchase spree. In this case, you take advantage of the low prices to buy several stocks with the hope that the prices will appreciate significantly in the future. When making such a decision look stocks form companies with a high chance of improvement.
This calls for patience and keenness as you wait for the market spell to end.
A bearish market run is usually a concern for many traders who may feel that it is the end of their trading until the conditions improve. However, if you have market experience this is another chance to make some extra gains in the market. Above are a few of the ways you can take advantage of the situation to stop you from going dormant due to a dip in stock prices in the financial sector.
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