In a bear market, what should retail investors do? 8 ways to make profits in bear markets
Some investors become panicked when the market begins to tumble. However, there are so many methods to profit from falling markets that there’s no need to act out of fear. Maintain your composure and understand how to trade declining prices.
According to the National Securities Depository Limited (NSDL) statistics, foreign institutional investors have sold shares worth Rs 1.38 lakh crore so far this year.
The Reserve Bank of India startled the market by raising interest rates to manage inflation and improving the Cash Reserve Ratio (CRR) to reduce excess liquidity out of the banking system during the last few sessions, causing Indian equities benchmarks to drop sharply. The Sensex and Nifty have dropped more than 12% since their all-time highs in October of last year.
According to experts, markets saw firm corrections due to persistent selling by foreign institutional investors (FIIs), worries of rising inflation affecting company profit margins, and premium values that markets were asking.
According to the National Securities Depository Limited (NSDL) statistics, foreign institutional investors have sold shares worth Rs 1.38 lakh crore so far this year. Due to rising bond rates in the US and the depreciation of the rupee vs. the US dollar, FIIs have turned sellers in Indian markets.
On Monday, the rupee fell to an all-time low of 77.47 vs. the US dollar because the dollar climbed against other major currencies.
“The rupee hit new all-time lows today because the dollar strengthened vs. its main counterparts. The central bank’s policy decision last week increased Volatility in most currencies. The common market attitude is being weighed down by a stronger currency and a continuing rise in global Crude Oil prices. This week’s focus will be on the inflation numbers that will be disclosed both domestically and from the United States.
“We expect the USD-INR (Spot) to trade with a bullish bias and quote between 77.20 and 77.80,” said Gaurang Somaiya, Motilal Oswal Financial Services’ Forex and Bullion Analyst.
Bear markets usually begin when the indexes decline 20% from their last highs. Market participants stated that while Indian equities benchmarks are now down 12.5% from record highs set in October, the prospects of entering bear markets are high in the current context.
“We are not in a bear market, we are not in a bear market, which is a decline of at least 20% from the peak. Will we get there eventually? I believe that, given the current course of events, we will soon be in a bear market, “Equitymaster’s co-head of research, Rahul Shah, told Outlook Business.
What Is a Bear Market and How Should I Invest During One?
A declining market is sometimes stated by the term a bear market. It is a market that has dropped by 20% or more from before its peak and has lasted for a long time (usually two or more months); when the number of selling outnumbers the number of buyers, a pessimistic market attitude results.
A bear market usually refers to the whole market or an index, but it may relate to specific stocks or commodities.
Bear markets, in which Assets fall 20% from recent highs, are included in the most terrifying financial catastrophes. However, do not stop investing.
Many investors are terrified when they hear the words “bear market.” But, unlike the period of bull markets, when the market is gaining in Value, these deep market downturns are inevitable and often relatively brief. Even in downturn markets, there are fantastic investing possibilities.
Here’s what a bear market is and what you can do to ensure your portfolio survives (and even flourishes) until the bear turns into a bull.
Bear markets occur when the Value of an investment drops by 20% or more.
A bear market is defined by a sustained decline in investment prices, usually 20% or more from their most recent high. Individual companies and the whole markets, like the Dow Jones Industrial Average or the S&P 500, can experience bear markets.
While 20% is the cutoff, bear markets often fall majorly more than that over time, rather than all right now. Despite a few “relief rallies” here and there, the market is still trending downhill. Investors at last search attractively priced equities and begin buying, thus ending the bear market.
Investors’ pessimism and lack of confidence define bear markets. Investors seem to ignore any positive news during a bear market and continue selling aggressively, driving prices further lower.
While investors may be pessimistic about a single stock, this may not impact the whole of the market. When the market goes negative, all equities inside it begin to fall, even if they report positive news and extend earnings individually.
How long do bear markets last, and what causes them?
A bear market often happens shortly before or after the economy enters a recession.
Investors pay close attention to important economic indicators like hiring, wage growth, inflation, and interest rates to determine if the economy is slowing. Some of the signs were different in the example of the COVID-19 pandemic. Closures on a large-scale increase in jobless claims and social distancing measures were all signs that the economy was in crisis.
Investors expect business earnings to fall shortly because the economy is contracting. As a result, they sell equities, causing the market to fall. A bear market may portend higher unemployment and more challenging economic circumstances ahead.
Bear markets are often shorter than bull markets, lasting 363 days on average vs. 1,742 days on average. According to data gathered by Invesco, they are statistically less severe, with average losses of 33% compared to bull average market profits of 159 percent.
The coronavirus bear market, which began on March 11, 2020, became bullish just a few weeks later, while the virus’s actual economic impact is still to be found out.
How to Make Money in a Bear Market
1. Use dollar-cost averaging to your advantage.
Assume the stock price in your portfolio falls 25%, from $100 to $75 per share. If you have money to buy and want to gain more of this company, it probably is tempting to try to buy when the price seems to be falling.
The problem is that you’ll almost surely be wrong. That stock may not have fallen 50% or more from its high, rather than bottoming around $75 a share. This is why trying to “time” the market or select the bottom is dangerous.
A more conservative way is to invest money in the market at fixed intervals using a process known by the term dollar-cost averaging. Dollar-cost averaging is investing money in nearly equal quantities over time. This smooths out your buying price over time, ensuring you don’t invest all of your money in stock while it’s at its peak (while still taking advantage of market dips).
Bear markets can be scary, but the stock market has shown that it will eventually recover. Bear markets may be fantastic opportunities to pick up equities at reduced prices if you change your mindset and focus on prospective profits rather than probable losses.
2. Diversify your investments
Boosting your portfolio’s diversity — so it contains a variety of different assets — is another brilliant strategy, bad market or not, when it comes to buying up equities at lower prices.
During bear markets, all businesses in a specific stock index, like the S&P 500, decline – but not always by the same amount. That is why diversification is so important. It helps to limit your portfolio’s total losses if you invest in a mix of relative winners and losers.
If only you knew who would win and who would lose ahead of time.
Because bear markets sometimes precede or coincide with economic recessions, investors often choose Assets that provide a consistent return – regardless of the economy’s state. Adding the following Assets to your portfolio is part of this “protective” strategy:
Stocks with dividends. Even if stock prices aren’t rising, many investors prefer to receive dividend payments. During weak markets, companies that pay higher-than-average dividends will appeal to investors.
Bonds. Bonds are a good investment during stock market downturns since their prices often fluctuate in the opposite direction of stock prices. Bonds are an important part of any portfolio, but adding more high-quality, short-term bonds can help you weather the storm.
3. Invest in sectors that perform good during downturns.
Look for sectors that perform good market downturns if you want to add some stabilizing Assets to your portfolio. Consumer staples and utilities traditionally do better in imperfect markets than other sectors.
Index funds and exchange-traded funds, which track a market benchmark, can be used to invest in specific industries. A consumer staples ETF, for example, will expose you to companies in that category, which tends to be more stable during recessions. Because each fund holds shares in several companies, an index fund or ETF provides more diversity than a single stock.
4. Keep the bigger scenario in mind.
Bear markets put all investors’ resolve to the test. While these times are tough to bear, history indicates that the market will most probable rebound quickly. If you’re investing for the long run, like retirement, the down markets you’ll face will be outweighed by bull markets. Short-term goals, defined being those that must be accomplished in less than five years, should not be invested in the stock market.
Even though it’s tough to resist the need to sell stocks when markets fall, it’s one of the most fragile things you can do for your portfolio. You may have a Robo-advisor or a financial advisor manage your money for you in good and bad times if you have problems keeping your hands off your investments during a bear market.
How Should Individual Investors Approach Bear Markets?
Following the elimination of lockdowns to combat the Covid-19 outbreak, equities indexes soared, resulting in a rush of retail investors joining the capital markets. According to Sebi, the number of Demat Accounts has more than quadrupled from 3.6 crores in March 2019 to 7.7 crores in November last year.
Millions of young investors had entered the market being first-time investors since the pandemic-driven lockdowns and work-from-home culture began, which coincided with a period when benchmarks climbed about 150 percent since the coronavirus-triggered meltdown in March 2020.
Since then, top brokerages have opened about a million Demat Accounts, with nearly 75 percent of them being held by investors under the age of 30.
According to Shah, investors should strive to sell low-quality equities and those with high values. He goes on to say that instead of focusing on equities that have dropped the most from their highs, investors should look for those that are selling at a discount to their true worth.
“In a bear market, equities that are either of poor quality or are highly priced fall down the most. As a result, investors should strive to keep their exposure to these stocks to a minimum. They may be able to make partial profits in high-quality businesses with high valuations, but there is no incentive to continue investing in low-quality stocks with a bad track record and weak balance sheets,” Shah explained.
“Rather of investing inequities that have dropped the most from their highs, look for those that are selling at a major discount to their true worth. A stock that has fallen 50% from its high may still be expensive, with opposed to one that has dropped 30% but is now selling at a discount to its fair Value. In contrast to the former, the latter has a major margin of safety, “Shah continued.
Sectors and Stocks to Pay Attention To
The present market environment is complex, and investors will not be able to make enough money they did in 2020-21. However, investors should seek companies that are debt-free, have strong Cash Flows, and have no inflationary impact, according to Vijay Chopra of business and financial consultancy company Enoch Ventures.
“Foreign investors are selling shares, which is countered by retail investors purchasing at high prices, although I don’t believe small investors are profiting enough like they did in 2020-21. Because there are few pockets of quality in today’s market, investors will have to hunt for companies that are debt-free, have strong Cash Flows, and have a little inflationary impact, “Chopra explained.
He goes on to say that if the Nifty falls below 15,800, it probably falls to 15,200-14,800 levels because interest Rates rise due to limited liquidity. Government support is important in the form of tax cuts that will benefit both businesses and individuals.
Chopra suggests investing in ABB since the business has built the world’s quickest EV charging technology.
“Petrochemical shares will perform good on the back of good gross refining margins (GRMs),” Chopra said. “Agrochemicals and seed companies should perform good ahead of the sowing season,” he added. “Sugar companies will p[perform ahead on the back of expected increases in ethanol blending, and defense companies are looking good because they will have a minimal inflationary impact.”
Metal, banking, and financial businesses, on the other hand, are expected to stay under pressure, according to Chopra.
What are the different types of downturns?
To distinguish a bear market from other downward price movements, we’ve looked at four different types of downward price movements and how they differ from a bear market. These are they:
Retracements or pullbacks in the market. This is a momentary reversal of a stock’s price movement. A downtrend occurs when the price of a stock falls after a recent upswing. Because prices vary all the time, a retracement doesn’t usually state much on its own. Thus technical indicators must be used to Assess whether it is a reversal or the beginnings of something bigger.
Reversals. A reversal occurs when an asset’s price movement reverses. In this situation, when an uptrend turns into a downtrend. It is a more protracted phase of decrease than a retracement. Reversal candlestick patterns, like double or triple bottoms should be avoided.
Market reversals. This is a 10% drop in a stock’s or index’s price from its 52-week high. A correction occurs when the share price of a firm changes to reflect its fair Value after a period of intense speculation has led to it being overvalued.
Recessions. A recession is defined by a six-month or more extended period of continuous economic deterioration. Securities will suffer if the economy is in decline because corporate earnings are hurt.
A ‘bottom’ is another phrase that traders interested in a downturn should be familiar with. A market bottom is the lowest price at which a security has traded in a specific time frame, like a day, month, or year. It is considered a key point of interest since it may serve like a suitable entry point for buyers or a benchmark for support levels.
how to manage your current investments in the happening of a market crash
It’s critical not to panic and join the herd at the beginning of a market crash, bear market, or even a more moderate downturn. While these downward price swings have a negative influence on portfolios, the level to which you are at risk depends entirely on your trading or investing aims.
Because you’re interested in the stock market’s long-term direction, there’s no reason to be afraid of a market slump for buy-and-hold investors. Bear markets are often far shorter than bull markets, which is why the stock market has risen in Value overall. The FTSE 100, for example, probably falls by over 4000 points and still be higher than it was 20 years ago, despite two bear markets in the meanwhile. However, like we’ll see shortly, the risks associated with downturns are entirely based on the approach you employ to invest in them.
Some investors may choose to hedge their stock portfolios to reduce the impact of these shorter-term market drops. However, because it entails initiating many positions, this technique is based on risk appetite and available funds.
Downturns and bear markets provide high brilliant profit chances for traders since derivative products allow you to bet on rising and falling markets. You may open a position on securities using derivative products without ever having to hold the underlying asset.
Bear market investing: how to profit when prices plummet
Investors and traders may benefit from market downturns in a number of ways or at the very least preserve their existing holdings from needless losses. Among them are:
Short-selling is perhaps the most prevalent technique to benefit from a market fall. Individuals can short sell in a variety of methods based on the market they want to trade and the product they wish to employ.
Traditional Short Selling
Borrowing a share (or another asset) from your broker and selling it at the current market price is the common strategy. If the market continues to fall, you may purchase the shares back at a reduced price at a later date. You’d then return the shares to the lender and profit on the difference in price.
If you were wrong and the market began to climb again – implying that the dip was only a retracement – you would have to repurchase the shares at the higher market price. It’s worth emphasizing that short-selling has the potential for endless losses because there’s no limit to how high a market probably climb in principle.
Learn how to sell a stock short.
Short-selling is an important aspect of derivatives trading; these products are totally speculative and get their Value from the underlying market price. The trader does not have to own the shares or Assets in question to trading derivatives.
When you trade CFDs or spread bets, you always have the choice of going long or short, so you may profit from markets that are falling in price and rising.
When you spread a bit, you’re betting on the direction in which the price of a certain asset will go. When you start a short spread bet position, your profit is contingent on prices falling, giving you the same result because when you open a standard short-selling position. When you trade CFDs, you’re buying a contract to swap the difference between an asset’s opening and closing prices, in this example, the price of a stock. To sell a CFD, you would open a position.
While we’ve been focused on stock market downturns, short-selling applies to a variety of other markets, including currencies.
Short ETF trading
A short ETF, known by the term an inverse ETF, is designed to benefit when the underlying benchmark falls in Value. They are made up of a spectrum of derivative products, most of the which are futures contracts.
It’s similar to shorting securities; only you’re purchasing the market instead of borrowing an asset to sell. Inverse ETFs allow investors to profit from a downturn without having to sell anything short.
If you think the FTSE 100 will fall in Value, for example, you may buy a short FTSE 100 ETF. The short ETF would rise in Value if the UK benchmark fell in Value.
Inverse ETFs aren’t often considered long-term investing vehicles since the derivatives they’re based on are bought and sold on a daily basis by the fund’s manager, meaning there’s no surety of performance. Rather, investors usually utilize them to protect their stock portfolio against larger short-term drops.
Because the maximum loss is limited to the amount invested in the ETF, short ETFs are regarded being a safer alternative to traditional short-selling.
Safe-haven asset trading
A safe-haven asset is a financial product that maintains – or even gains in Value – its Value beacuse the larger market falls. Because these Assets are inversely connected with the economy, investors and traders often use them likie a safe haven during market downturns.
To prepare for market downturns, you would theoretically place a long position on a safe haven. This is looked like a better option than closing positions or going short since it allows you to hedge any existing positions.
Gold, government bonds, the US dollar, the Japanese yen, and the Swiss Franc are all examples of safe-haven investments. It’s important for investors and traders to understand, though, that just because an asset has a reputation for being a safe haven doesn’t mean it will perform good in every market downturn.
If we take gold like an example, you will buy the actual precious metal like a store of Value to invest in the safe-haven asset. If you only want to speculate on the Value of safe havens, however, you may use derivative products to avoid having to take delivery of the asset.
There are several currencies that are often use like a safe havens during financial downturns, but this is only one strategy to use the forex market to protect against market downturns.
A national currency’s Value is determined by the state of the domestic economy, which states that any perceived decrease in the economy will affect the currency’s Value. If an economy is perceived to be weaker than others throughout the world, its currency will decline against other currencies. For example, political Volatility and uncertainty damaged the attraction of investing in the United Kingdom during the Brexit discussions. The FTSE 100 and the British pound sterling both saw increased Volatility being a result of this.
Shorting a currency allows traders to speculate on the price of a deteriorating economy. You are fundamentally purchasing one currency and selling another when you trade forex. When selling GBP/USD, for example, you would do so if you feel the pound will lose Value against the US dollar.
Buying defensive stocks and going long
Defensive stocks are often used by investors to diversify their portfolios. These are stocks in companies that are regarded like consumer staples, meaning that their products are required regardless of economic conditions. Food and beverage producers, and utility corporations, are examples.
When the economy is performing good, money tends to flow into cyclical equities or companies that make non-essential goods, when an economy is undergoing a downturn, the attention shifts to enterprises that manufacture consumer goods.
Discover seven defensive stocks that probably help you diversify your holdings.
When pessimistic sentiment arises, investors prefer to flock to defensive equities, just like they do to safe-havens. Traders may keep an eye on defensive stocks to see whether the market is changing moods and use the companies like a barometer for the overall stock market’s health.
Dividend stocks with a high yield
While concentrating on growth companies has been the standard, these are the stocks that suffer the most in bad markets. This is because if their valuation isn’t supported by good fundamentals – i.e. if they’re overvalued – the stocks may fall even more.
In a down market, looking for dividend stocks may be a wonderful approach to search value. While a company’s stock price may suffer, this does not always state that the company’s fundamentals are unimportant. Dividends may be paid if a company’s balance sheet is strong.
To locate companies with a high dividend yield, use internet tools like IG’s stock screener. Once you’ve found a dividend stock you like, you may buy using our share dealing service or start a trading Account to speculate on the company’s share price.
Trading options contracts provide you the choice, but not the duty, to purchase or sell an underlying asset at a given price by specified expiration date. Options are often employed for sheer speculation, but they are a popular technique for investors to protect themselves against decreasing stock prices.
There are other alternative tactics that may be employed, but two of the most prevalent are:
-Investing input options
-Covered call writing
Investing input options
When you buy a put option on a stock, you’re betting that the stock will lose Value. Buying a put Offers you the option to sell shares at the striking price if the underlying market price falls below the strike price. If the underlying market price falls below the strike price, you may exercise your option and sell the shares at a higher price.
Let’s imagine the stock of business XYZ is at present selling at £35, but you feel it is about to fall in Value. You purchase a one-month put option with a strike price of £30. If the market price at the time of expiry was £25, you may carry out your put option and sell the shares for £30.
As the underlying market falls, the Value of a put option rises. If the underlying market price approaches the strike price, the Value of the option will fall.
Buying a put option is less risky than short-selling the company since you can let the option expire if the market rises higly. Only the premium you paid to open the position will be lost.
Covered call writing
Writing a covered call entails selling a call option against a stock you already own, assuming the responsibility to sell that stock to the call option holder. You will have no choice but to sell your shares if the buyer exercises the option. This states that the quantity of profit you may make is limited.
When the market is falling, you may be tempted to sell your stock, so writing covered calls is a wonderful method to profit from the sale. The buyer would be expected for a market rebound, so if the stock doesn’t rise, you’ll most probable to be allowed to keep your shares and the premium.
Buying at the bottom.
It’s critical not to buy the first stock you come across, regardless of its reputation before the bad market. Many traders and investors will use fundamental and technical analysis to find equities with a promising outlook. Always take into Account the balance sheet, Value, management plan, and debt levels of a firm.
Lenders will be seeking companies that are best positioned to pay off their obligations and recover from the bear market, so traders can spot attractive chances to purchase at the bottom by gauging how creditworthy a lender feels a company is. AAA, AA, and A bond ratings means that a corporation is regarded like creditworthy, while anything below that is considered a risk.
You probably invest after the stock has achieved a valuation that you believe is reasonable. It’s important to remember that the stock price is unlikely to recover soon, but if you’re confident in your research, you may be quite certain it will.
Recognizing bear markets
Before you can begin trading bear markets, you must first understand what signs to watch for signify the onset of a decline. Among them are:
Market rallies that failed. An advance that fails to gain traction is the most prevalent warning that a bear market is approaching. This indicates that the bulls are losing market power.
Economic downturn. When the economy begins to decline – as seen by growing unemployment, soaring inflation, and bank failures – it is almost always a hint that the stock market will follow suit.
Interest rates are rising. Individuals and corporations cut down on spending when interest rates rise, lowering earnings and stock values.
More defensive stocks are starting to outperform. When companies that provide consumer staples outperform other industries, it’s usually taken like a warning that a period of economic development is coming to an end because consumers are lowering down on frivolous purchases.
How often do markets go downhill?
There is no specific answer to this since it relies entirely on the type of market downturn in question.
During periods of high Volatility, retracements and pullbacks may occur several times every day, although major market downturns, including corrections, bear markets, and recessions, occur less often. Analysts, for example, predict one market correction every two years.
Bear markets and recessions are highly publicized and have far-reaching consequences. The last major bear market happened during the 2008 financial crisis when the S&P 500 fell by 56%. It was 517 days long.
It’s worth remembering that economic downturns last (on average) shorter time than periods of expansion. Economic expansions in the United States have lasted 57 months since 1945, compared to only ten months for economic downturns.
Summed up the downward market
Bear markets, which occur when a market decreases by 20% or more for an extended period, are stated by the term downward markets.
Other forms of downward movement include: Reversals, market corrections, and recessions are all examples of pullbacks or retracements.
It’s critical not to panic and join the herd at the onset of a bear market or even a more transitory slump.
Market downturns aren’t always a problem for buy-and-hold investors, focused on the stock market’s long-term direction.
Downturns and bear markets provide fantastic profit chances for traders because most trading platforms allow you to speculate on rising and falling markets.
In sinking markets, there are several strategies to profit: trading safe-haven Assets, currencies, and options, focusing on defensive equities and dividend stocks, or purchasing at the bottom.
Failed market rallies, economic deterioration, increasing interest rates, and the rise in the Value of defensive stocks are all signals that a bear market is about to begin.
Depending on the movement, downward markets probably occur at varying frequencies. A pullback, for example, will be more common than a recession.
edited and proofread by nikita sharma