Both bear markets and bull markets symbolize tremendous opportunities to make money, and the key to success is to use strategies and ideas that can produce profits under a variety of conditions. This requires steadiness, discipline, focus and the ability to take advantage of fear and greed. This article will help make acquainted you with investments that can prosper in up or down markets.
Ways to Profit in Bear Markets
A bear market is termed as a drop of 20% or more in a market average over a one year period, measured from the closing low to the closing high. In general, these types of markets occur during economic recessions or depressions, when pessimism prevails. But amidst the rubble lie opportunities to make money for those who know how to use the right tools. The following are some ways to profit in bear markets.
taking a short position, also known as short selling, occurs when you sell shares that you don't own in expectation that the stock will fall in the future. If it works as designed and the share price drops, you must buy those shares at the lower price to cover the short position. For an example, if you short ABC stock at $35 per share and the stock falls to $20, you can buy the shares back at $20 to close out the short position. Your overall profit would be $15 per share.
A put alternative is the right to sell a stock at a particular strike price until a definite date in the future, called the expiration date. The money you pay for the alternative is called a premium. Since the price of the stock falls, you can either implement the right to sell the stock at the higher strike price, or you can sell the put option, which increases in value as the stock falls, for a profit (provided the stock moves beneath the strike price).
A short exchange traded fund (ETF), also known as an inverse ETF, produces returns that are the inverse of a particular index. For an instance, an ETF that performs inversely to the Nasdaq 100 will drop about 25% if that index rises by 25%. But if the index falls 25%, the ETF will rise proportionally. This contrary relationship makes short/inverse ETFs appropriate for investors who want to profit from a downturn in the markets, or who wish to hedge long positions against such a recession.
How to Spot Bear and Bull Markets
The advance/decline line signifies the number of advancing issues divided by the number of declining issues over a given period. A number greater than 1 is considered bullish and the number less than 1 are considered bearish. A rising line confirms that the markets are touching higher. Nevertheless, a declining line during a period when markets continue to rise could be an indication of correction. When the line has been on its last legs for several months while the averages continue to move higher, this could be considered a negative correlation, and a major correction or a bear market is probable. An advance/decline line that continues to move downward, signals that the averages will remain fragile. Nevertheless, if the line rises for several months and the averages have moved down, this positive divergence could mean the start of a bull market.
Price Dividend Ratio
The price dividend ratio is the ratio that compares the share price of the stock with the dividend paid out over the precedent year. It is designed by dividing the current price of the stock by the dividend. A turn down in the ratio in the range of 14 to17 could indicate an appreciable amount of bargain. This ratio and its explanation will vary by industry, as some industries conventionally pay high dividends, while growth sectors regularly pay little or no dividends.
There are many methods to profit in both bear and bull markets. The key to success is using the apparatus for each market to their full benefit. In addition, to this, it is important to use the indicators in combination with one another to spot when both bull and bear markets are beginning or ending.
Short selling, put options, and short or inverse ETFs are just a hardly any bear market tools that allow investors to take advantage of the market weakness, while long positions in stocks and ETFs and a identify option are suitable for bull markets. The advanced turn down line and price dividend ratio will permit you to spot market tops and bottoms.
Markets trade in cycles, which mean that most investors will experience both in a lifetime. The key to profiting in both types of markets is to mark when the markets are opening to top out or when they are bottoming. The following are two key indicators to appear for.