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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.
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 easy to see how one can make money in a bull market. In fact, it’s hard not to make money in such a market. But how can you make money in a declining market?
One such way is if you could accurately predict the end of the falling market and then buy a selection of top quality stock tips. Although you can use a variety of fundamental and technical indicators to help you with predicting the turning point, it remains very difficult. Even the best of traders often fail to correctly predict the turning point of a slumping market.
A further option you have is to sell stocks short. What happens in effect is that you borrow stocks from your brokerage and then sell them to another trader at the current (high) price. Once the negative market has taken its toll and the price of the stock is much lower, you buy it again and give back what you borrowed from the brokerage. It will of course only work if the market actually goes down.
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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