How Do Bears Make Money in the Stock Market: The “buy and hold” strategy has been one of the oldest and most successful strategies helping investors across all categories to make money.
That means investors are required to stay invested for the long haul if they want to capture the best profits. However, did you know that you can make returns even when the share price goes up and also when the share price goes down?
Investors who believe that particular stock or the market is headed downward and may attempt to profit from a decline in stock prices are called a bear.
However, it is important to know exactly how bears make money in the stock market as there have been several stock market crashes in the past couple of years.
While everyone can generate returns when markets rise, it is important to look for money-making opportunities when markets fall. This article will focus on how to make money when markets fall drastically.
Read on to find out How Do Bears Make Money in the Stock Market.
Bear Market – What is it?
To know how bears make money in the stock market, it is important to have a basic understanding of the bear market. The tag of a bear market is given when there is a 20% drop from recent highs.
The term is most commonly used to refer to the performance of NIFTY50, which is considered a benchmark indicator of the entire stock market.
However, the term “bear market” can be used when referring to any stock index, or even to refer to an individual stock that has fallen by 20% or more from its recent highs.
For example, when the company reports poor earnings or when it recalls its new product, there is a possibility that the stock price might plunge by more than 20% from the recent high.
In a situation like this, we can say that its price has fallen into the bear market territory. More often than not, the terms bear market and stock market correction have been used interchangeably. However, these terms point to 2 different magnitudes of negative performance.
Correction in the stock market takes place when stocks fall by 10% or more from the highs made recently, and this correction can be upgraded to a bear market once a threshold of 20% is met.
How Do Bears Make Money in the Stock Market?
Now that we know what the bear market is, it is time to discuss the money-making strategies which are used by bears in the stock market.
1. Shorting the Positions
The most popular method used by bears to make money in the stock market is shorting, also known as short selling. In this strategy, traders borrow the shares and sell them in anticipation that they will fall more in the future.
When the share price falls, traders buy those shares at the prevailing price (which is lower) to cover short positions. Therefore, the difference is the profit.
2. Put Options
Another way the bears can make money in the market is by buying a put option. A put option is bought when the price of the underlying asset is expected to fall down.
In a put option, the premium on an option contract increases when the price of the underlying asset decreases. Here the bears are the buyers of put options and they make money when the price of the underlying asset falls down.
3. Inverse ETFs
Individuals can choose to invest in inverse ETFs to safeguard their portfolios. By their very nature, inverse ETFs tend to work by changing values in the opposite direction of their benchmark index.
4. Buying Dividend Stocks
When the markets turn bear, investments in dividend stocks can be beneficial. During such times, it is important to choose companies paying high dividends. Dividends help in generating a steady income.
How Do Bears Make Money?
Bears are traders who have a pessimistic view of the market, asset, or financial instrument. They believe that the instruments are heading toward a downward trajectory. Hence, Bears make profits when the market heads in a downward direction.
To Sum Up
More often than not, bear markets do not last forever. Therefore, investors are required to be patient with their investments. Panic selling will only impact the returns of the portfolio.
It is of utmost importance to monitor the growth of the companies. Most of the time bears make money by shorting stocks. However, thorough research is required before applying the shorting technique.
That’s all for the article on How Do Bears Make Money in the Stock Market, We hope you enjoyed reading it. Happy Investing!
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