A bear or down market is characterized by extended periods of price drops in the financial market. Individual stocks, indices, cryptocurrencies, and other assets can experience a down market. Usually, a market is considered bearish if its price has dropped by at least 20% from its recent uptrend.
Luckily for those who buy and hold, these periods do not last too long. According to expert analysts, the market bounces back within ten months on average. Opportunities abound regardless of the market condition, and seasoned investors know how to capitalize on such markets. This article will share thirteen ways savvy investors take advantage of a bear market condition.
#1 – Short-selling derivatives
Short-selling is one of the most popular ways to profit from a bear market. There are traditional and derivatives short-selling types, depending on the asset the investor chooses.
Derivative assets are speculative. The investor does not have to own the asset. They either spread bets or go short in CFDs. Whether prices are falling or rising, you can invest in a derivative according to the trend and make money.
A spread bet allows you to bet on the price direction of an asset. That means you can bet on falling prices in a down market and make a profit.
#2 – Traditional short-selling
Traditional short-selling involves borrowing an asset from your broker and selling it. In a downtrend market condition, the price is bound to fall lower. The investor then buys back the asset, returns it to the broker, and pockets the difference as profit.
Traditional short-selling is tricky. The trend may change unexpectedly. If the investor’s analysis turns out inaccurate and the market rises, they would have to buy back the asset at a higher price. There is the possibility of losing a lot of money if the market climbs higher than expected in a short period.
#3 – Investing in bonds
During market downturns, some investors use bonds to protect themselves. Bond values usually move in the opposite direction to stocks. For this reason, they hedge their investment and benefit from the stock’s falling prices.
Bonds are of different types, and some are high-risks. High-grade bonds are more appropriate in this market condition.
#4 – Inverse ETFs
Inverse ETFs involve going short on some exchange-traded funds. It is like the bonds described previously. The short ETFs appreciate when the securities they track to decline. ETFs usually comprise various derivative assets. Dealing with them in a down market is similar to short-selling an asset, though not traditional short-selling.
For example, expecting the “spider” (SPDR S&P500) to drop further, you invest in SPDR S&P500 short. As this US benchmark decreases in value, the short ETF increases. This investment style is more suited to short-term hedging in a bear market. But investors also use it to make money in the short term in such a market condition.
#5 – High-yield dividend stocks
Dividends are parts of the company’s profit that distributes to investors. Not all stocks are dividend stocks, and the dividend ones tend to have less volatility. That is why savvy investors include them in their portfolios. In a bearish market, these types of stocks lessen the portfolio’s risks and earn the investor an extra income.
#6 – Safe haven assets
Safe haven assets do not lose their value during down market conditions. In some cases, their prices increase. Because they negatively correlate with the economy, going long on these assets during harsh times benefits the investor. They are also useful for hedging. Examples of safe haven assets are gold and some government bonds. A few forex assets also serve as Safe haven currencies. These include the Swiss Franc, the USD, and the Japanese yen.
#7 – Forex trading
The forex market is the most liquid, with lots of buying and selling activities regardless of the global economy. Investors can speculate on exchange rates and make money. Whether the currency pair is trending up or down, there are opportunities to earn good profits in this investment type.
#8 – Investing in essential products
A down market implies difficult economic times. It is a period when people spend more on necessities. Stocks and indices that track food, utilities, or other essentials do well during these periods.
#9 – Trading options
Options trading involves entering a contract that gives you the right to buy or sell a specific asset within a set time. Investors use buy put options to hedge their portfolios. But as these assets gain value when the market declines, there is a potential to profit from them.
#10 – Covered call options
Covered call options are also a way to hedge. Investors write a covered call to sell the stock they already own. If the buyer exercises their right, you will sell the shares to them at the set rate. You would earn income through a premium on the options whether the buy uses their right or not.
#11 – Dip buying
In a down market, some strong companies often rise from time to time. A seasoned investor identifies these stocks and buys the dip. Reselling once the opportunity presents itself.
#12 – Arbitrage
Stocks market varies according to geographical location. Arbitrage involves buying and reselling stocks in a different market. A savvy investor may identify stocks that sell higher in a different market. They will then buy and resell immediately in such a market.
#13 – Re-arrange portfolios
Once a market takes a downturn, experts will know how to re-arrange their portfolios to eradicate any potential loss. For example, it is a time to drop some assets and pick up others. Or hedge the entire portfolio while profiting from the falling prices.
Additionally, savvy investors resist selling off all assets.
A down market can be scary. But a seasoned trader has been there and done that several times. Therefore, they remember that prices have crashed before, only to rise back up after a period. Long-term investments have survived such times. Hence, selling off all assets due to crashing prices can be detrimental to one’s portfolio. The effects of inflation are much worse than a temporary downtrend market condition.