The stock market has been one of the favourite investment options for many investors. It passes through three major phases; bull phase, bear phase and consolidation phases. Making an investment in the bear phase is one of the trickiest tasks. This is because there is widespread pessimism in the market and the stocks keep making new lows. Therefore, to survive in a bear market, you must have good bear market investing strategies. In this article, you will learn how to make bear market investment.
Let us first learnt the reason for bear markets.
Reason for Bear Markets
There are many triggers that take the markets into a bear phase. The global factors are the most common causes of it. And, a bad shape of the domestic economy further adds to the market woes. If we look into the history, unrest in the Middle East which affects the oil prices has always been a major reason for markets entering into the bear's grip. Moreover, instability in any part of the world also affects the stock market in some way or the other. Making bear market trading strategies in such a market can be tough because you cannot predict how worse the situation can go. Similarly, a fall in GDP of a country is another reason for bear markets. The slowdown in the economy leads to lower consumption and expenditure by the people. Here the market remains in bear mode until the economy shows signs of revival. Other factors that contribute to bear markets are double-digit inflation rates, unfavourable monetary policies, unstable political environment, etc.
In order to counter these situations, you need to have solid investment strategies. So, let us learn about the strategies that can give you good returns during the bear market investment.
Strategies for Bear Market Investment
When the market enters into a bear mode, purchasing index funds at lower valuations can be very fruitful. The index funds replicate the performance of the index like Nifty or Sensex. Buying index funds can be one of the good bear market investing strategies because when the market will start rising you can make huge returns. Like for example, people who bought index funds during the recession in 2007-2009 and hung in there made huge profits in 2015. So the best way to purchase them would be to keep investing a small amount at every lower level rather than purchasing them at one go.
- Buying Short and Long Term Puts
You can make bear market trading strategies in the derivative segment to make profits in the bear market. When you feel that the market is entering into a bear phase and there are many long positions still existing, you can purchase short and long term puts on the indices. When you purchase puts and the market declines, you will make good gains with it. The options market move by a much larger percentage in comparison to the stocks, so even small put contract can give you huge returns and compensate for your losses in the long positions. These contracts need to be settled before the expiry period.
Selling naked puts is another strategy to tackle the bear markets. When you sell the puts that others want to buy for premium is called naked put selling. There are always many buyers in the bear market and you can sell them a put contract. Here, you make a profit of the entire premium amount if the put contract expires at similar or above the strike price. Therefore, the best strategy in the derivative segment during a bear market would be to keep selling short-term puts of good companies.
- Find Stocks That Perform Better
During the bear market, the stocks trade at low prices. In fact, with the fall many good companies are available at very cheap valuations. Therefore, to take advantage of lower prices you must make bear market investing strategies by purchasing good companies for the long term. By holding stocks of good companies for the long term, you can create huge wealth for yourself. Furthermore, there are many stocks that do well in the bear market, all you need to do is research well and figure out such stocks. Purchasing stocks that are outperforming the market can help you make good profits even in the bear market.
After understanding the strategies for a bear market, there are few more other things that you must do or be aware of in the bear market, they are as follows.
Things to Consider in Bear Market
- A bear market is unavoidable and it is one of the phases of the stock market. When there are good times in the market, there would be bad too. Just remember the fact that good time will always outweigh the bad in the long run.
- Always balance your portfolio in the bear market. Allocation in the right assets or stocks is the key for good returns in the long term. Most successful investors make an investment in the bear phase and sell in the bull phase.
- Avoid margin trading during the bear market. Margin brokers allow you to trade more than you could potentially but you must not fall into the trap. The bear market is so powerful that it can wipe out your whole capital by way of margin payment. The best strategy in bear market is to purchase stocks and hold them for long period.
- There is always a temptation to short sell in the bear market. You need to control that urge because when you short sell a stock you hope to purchase it back at a lower price. But the market does not guarantee anything. It is very much possible that the stock price would rise after you short sell and hence, you must avoid it.
The above mentioned are a few things that you must do or be aware of in the bear market. However, if you want to seek the help of an expert to make an investment in any type of market, you can contact us . We aim to protect your capital and help you earn profits with systematic investment under the guidance of our highly qualified experts.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.