How To Profit From a Bear Market

[TL; DR]

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A bear market is a market with a downward spiral in prices by more than 20%.

It can last for a cycle (weeks or months), or it can be long-term (a year or decades).

The reasons for a bear market include a stagnant economy, pandemics, wars, geopolitical problems, severe economic paradigm changes.

The indications of a bear market are inadequate employment, insufficient disposable income, weak productivity, and a decline in business profits.

A bear market isn't always a loss; it is also a business opportunity.

You can profit from a bear market by signing up for a retirement plan, buying short and long-term puts, trading puts for cash, or locating assets that may retain value.

There are high and low points in a market system, depending on many factors. They are a normal part of the market cycle.

Yet, a not-so-normal part is when the market price keeps declining.

This occurrence is called a “bear market.”

What is a Bear Market?

A bear market is a market with a sustained period of downward trending stock prices.

Technically, in a bear market, asset prices drop by 20% or more over a protracted period. This interval can be relatively short-term, i.e., weeks or months, or long term, i.e., years.

A bear market is characterized by pessimistic investor sentiment and reduced economic opportunities.

It is the direct opposite of a “bull market,” which denotes when prices of securities are expected to rise.

The term “bear market” is inspired by the bear (animal) that acts by striking its paws downwards. It is a parallel for how stock prices go downwards in a bear market.


A bear market doesn't just happen on its own, and some occurrences take place that leads to it.

Causes of a Bear Market

The following are some of the reasons why a bear market occurs:

Slow Economy
When an economy is stagnant, there is little or no purchasing power, which leads to a decline in the value of assets and, in the long run, a bear market.

Pandemic
By the beginning of 2020, the stock market was in a bull state, but as COVID-19 began ravaging different countries more intensely, it moved to a bear state. There was pandemonium everywhere which reflected on the market as the value of securities reduced.

Political conflict
In a political conflict like war, people will most likely liquidate their assets hurriedly to have cash with them. A resultant consequence is a decrease in the value of securities.
Those are some of the causes of a bear market. Once they occur, some signs begin to show that indicate a bear market is bound to happen.

Indication of a Bear Market
These are some indicators of a bear market:

Low disposable income
When people do not have funds to buy digital assets, their value depreciates.
This leads to an overall decline in its price, thereby causing a bear market.

Unemployment
When there is a low level of employment (unemployment), people are less likely to have disposable income to buy assets. Therefore, there are fewer purchases and eventually a reduction in the value of stocks.

A decline in business profits
Lack of gainful employment leads to little or no disposable income, which ensures that people can hardly purchase assets, leading to a drop in business profits. Once the dip continues for a while, it indicates a bear market.

On a brighter note, a bear market can also be a great buying opportunity while prices are depressed, and this is because most people will refrain from buying assets due to their low value.

Bear markets don't last forever. While it is generally seen as a period of loss for the majority, and rightfully so, it can also be an opportunity for others. To benefit from a bear market, you have to employ specific strategies.

How To Profit From a Bear Market

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As earlier said, a bear market is a normal part of the market cycle. However, speculation for when one will occur, the duration or severity cannot always be accurate.

A smart decision will be to position yourself in a way that you can benefit from it when it comes.

These are some techniques you can employ in a bear market to ensure that you profit from it.


Signing up for the 401(k)
The 401(k) plan is an American retirement savings plan.

A percentage of your paycheck gets paid directly into an investment account by signing up for it.

There are two forms of 401(k):

· Traditional 401(k): The money comes from the employee's payroll before discounting income taxes.

· Roth 401(k): The payment comes from the employee's salary after subtracted income taxes.

Whichever 401(k) plan you choose to use, even in the event of a bear market, you will still have funds saved up.

Buying Short- and Long-Term Puts

You can acquire economical short and long-term “puts” on the major indices (securities statistics).

A put is an option that exemplifies rights for 100 shares, has a fixed duration length before it ends worthless, and has a stipulated price for selling.

Peradventure, you buy puts on the Russell 2000 index, and the market dwindles; your puts will increase in value as this index falls.

Since options increase or decrease at a lesser rate than stocks, a small number of put contracts can compensate for your extended stock position losses.

And as the expiration date draws near, you can sell your puts on the open market or give up the shares.

However, this is a risky and complicated strategy that may require a high level of experience and expertise to pull off.

Sell Naked Puts
A naked put is an options method in which the investor writes or sells puts options while not holding a short position in the underlying security.

Selling a naked put includes selling the puts that others want to purchase in trade for cash premiums.

In a bear market, there would be many eager buyers. Plus, there will be intervals where stock prices increase, giving you dividends from these short-term put sales.

Consequently, if the market continues to plummet, those short puts can lead to significant losses for you.

Finding The Assets That Don’t Depreciate In Value

Some assets do not usually plummet in value during bear markets. Some stocks or specific market sectors like real estate or entertainment appreciate some occasions.

You can invest your funds, thereby knowing which asset or sector retains or appreciates.

Conclusion

A bear market, although regular, often leads to a widespread decline in profits. While this should generally be seen as bad news, it can be a productive venture for some.

You have to be proactive and implement the above techniques - a profitable way to benefit from a bear market.



Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.

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