You have no doubt heard the terms ‘bear market’ and ‘bull market’ before. What do they actually mean? A bear market is when there is a widespread and sustained drop in the prices of stocks over a period of time – Normally considered to be at least a twenty percent drop over a period of two months. As people get scared and sell their shares, it serves to push down prices even further.
A bull market is exactly the opposite of a bear. Prices start rising and continue to rise with more than twenty percent for more than two months. Just as pessimism drives a market with dropping prices even further down, optimism drives a bull market upwards.
You shouldn’t get confuse a declining market and a normal market correction. A market correction happens after a sudden increase in the price level when people sell their stocks to take profit. It normally doesn’t last more than a few days.
It’s not difficult to understand how people make money in a bull market – it’s in fact difficult not to make money when prices go up all the time! How do traders make money while prices are dropping though?
One way of making money in a declining market is if you could with some degree of accuracy predict when the market has reached its bottom. Then buy a bunch of stock tips. Traders use all sorts of fundamental and technical indicators to assist them with this, but it remains a mammoth task. Many highly experienced traders still often lose money because they incorrectly expected the market to turn around.
A further option you have is to sell stocks short. What happens in effect is that you borrow stocks from your brokerage and then sell them to another trader at the current (high) price. Once the negative market has taken its toll and the price of the stock is much lower, you buy it again and give back what you borrowed from the brokerage. It will of course only work if the market actually goes down.
A further course of action is to buy so-called put options, which increase in price when the market declines. Once again you have to be pretty sure it’s actually a bear market which is still in a declining phase, otherwise you will lose the money you risked on the option.
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