Bear markets and Bull markets are the two phases of stock market and both of them are pretty evident. Whenever there is a decline in the market prices, it is referred to as a bear market phase and it is a fact of life.
It is hard to anticipate a bear market or predict how long will they last or how severely will they impact the prices of an asset or asset class. But is it necessary that as an investor you will always incur loses in a bear phase?
Well, certainly not. You can survive bear markets and moreover you can also extract some good profits from them, provided that you trade with some strategies and techniques.
Today, we will discuss about some of the techniques which will help you reduce your losses or even help in extracting some good numbers from the bear market. Let us discuss about them in details.
So, without further ado, let us discuss about each of these roles in detail to have a better understanding about the role of stock exchanges in the Indian Capital Markets
1. What is a Bear Market?
A phase in the market when the prices of securities and assets show a steep fall which also causes the market sentiments to further entrench themselves, it is known as a bear market or bearish market phase. In a bear market it is often observed that investors keep on anticipating losses and selling positions prevail, which leads to growth of pessimism.
However, predicting a bear market is not easy. A steep decline of around 20 per cent in the Nifty and Sensex can be considered as the beginning of a bullish market phase. Moreover, it is very hard to judge the end of the bear market.
It is not necessary that a bearish market will only incur losses for you. If you utilize the following techniques, there are chances that you may limit your losses in the market and moreover and you may also extract some positive returns from the markets.
2. Strategy #1 – Bottom Fishing:
Buying ion dips or bottom fishing is one of the most common and widely used technique during a bearish market. It involves buying stocks and assets at their lowest levels and sell when there is a rise the price. Investors usually prefer bottom fishing for short-term and long-term horizons because bottom fishing in intraday is highly risky. However, bottom fishing may sound very simple and easy technique but actually it is just the opposite.
It is very difficult to predict the bottom levels of the market. Hours of research and experience is required for the same, so if you are not experienced enough, it is recommended to take the services of a SEBI registered investment advisor who can do the research work for you and provide you recommendations based on the same.
3. Strategy #2 – Buying Puts:
Investing and buying inexpensive short and long term put options on the major indices can prove out to be very beneficial in a bearish market. However, it is important to note that trading in derivatives comes with requirements of margins. If you feel that market is heading towards a bearish phase and have substantial long positions, it is better to buy puts.
A put option represents the rights for 100 shares and also comes with a fixed time length before it expires on the expiry date. Also, the put option has a specified price for selling. So, if you have invested in outs on the Nifty, Sensex etc. and the market falls, there are high chances that your puts will appreciate in value because the index is falling.
4. Strategy #3 – Selling Puts
Selling a put option means that you are selling an asset which others wants to buy against cash premiums. In a bear market, there are plenty of buyers available and there is no shortage usually of prospects for buying puts.
When you sell a put option, there are chances that the same will expire worthless at or above its strike price. If the same happens, there are chances that you will earn profits by keeping the entire premium. However, if the prices fall below the strike price, and the holder exercises the option, you will be forced to take the delivery of the shares and bear loss.
5. Strategy #4 – Finding Values
Research is what is required here. Researching across the bear markets to find about the stocks, sectors or asset classes which went up could be the key here.
There are chances that precious metals like gold and silver may outperform. Defensive stocks or food and personal care stock can also be the saviors over here. These stocks may go up when there is a down trend in the remaining market. However, if you are new to the market, it is better to take the services of a certified investment advisor who can perform the research work for you and provide you recommendations based on the same.
Conclusion
Bear markets are a fact and it is very important not to fear them. As we discussed, these techniques may help you in limiting your losses or even extracting some profit from the bear markets. But, as we always say, risk profile analysis is the key and you should get your risk profile updated before entering any sort of investment.
