You Can Profit In A Bear Market
You've doubtlessly already heard about the terms 'bull market' and 'bear market'. What do these really mean? A bear market is simply when you have a drop in a large number of share prices over a relatively long period of time. Traders normally talk about a bear market when prices have dropped at least 20% over a period of no less than two months. As more and more people sell their stocks, market prices are pushed down even further.
A bull market, on the other hand, is therefore a prolonged, widespread increase in the prices of stocks. Just as the pessimism of a declining market pushes it lower, the optimism that drives a bull market tends to push prices even higher.
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 easy to see how one can make money in a bull market. In fact, it's hard not to make money in such a market. But how can you make money in a declining market?
One such way is if you could accurately predict the end of the falling market and then buy a selection of top quality stock tips. Although you can use a variety of fundamental and technical indicators to help you with predicting the turning point, it remains very difficult. Even the best of traders often fail to correctly predict the turning point of a slumping market.
Of course you always have the option to sell stocks short. This is rather less complicated than it sounds: all that happens is that you borrow a certain number of stocks from a brokerage at the (high) price of today and sell it to a third party at the same price. If you were right and the market actually drops, you then buy the same shares at the new low price and return them to the broker.
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.
Article Source: FxTradingStock.com
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by: Michael Swanson
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Word Count: 400
Date: Wed, 14 Jul 2010
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