Worries about an economic slowdown in China and plunging oil prices can send global marketing tumbling. So if you’re beginner looking to jump into a bearish market, you have to first learn to trade in this environment.
But before learning to trade in a bear market, you have to first understand what this investment channel is all about.
A bear market is basically a condition where securities prices drop, creating pessimism across the board. This, in turn, sends the stock market crashing down to be self-sustaining.
When pessimism rises, investors start anticipating losses. As a result, selling will significantly increase. But the figures in this scenario can vary quite a bit.
For example, from the peak of multiple board market indexes to a 20% downturn in let’s say the Dow Jones Industrial Average (DJIA) over a period of a couple of months is considered as an entry into a bear market.
However, when you learn to trade in this environment, you have to note that this shouldn’t be confused with a market correction.
A correction is a short-term trend and will last less than a two month period. When a correction occurs, it provides a good time for value investors to find a way to enter the stock market.
This happens as it’s almost impossible to speculate about the bear market’s bottom. As a result, recouping your losses can end up being a major uphill battle for investors.
The bear market usually occurs about every three and a half years. The last bear market was during the global financial crisis that occurred between 2007 and 2009.
When you learn to trade in a bearish environment, it’s best to learn about short selling. Investors can engage in short selling by selling shares that are borrowed and then buying them back at a lower price.
The short seller borrows these shares from a broker before the order for a short-sell is placed. The difference between the selling price and the buy-back price is called “covered.”
Finally, you can also have put options which give the owner a right but not the obligation to sell at a specific price by a certain date.
This technique can be used when speculating on falling stock prices. Then it can be hedged against the falling prices to safeguard your long-term portfolio.