Bear Market: How to Invest in a Falling Market?
Investing in the share market is more than just opening a demat account and trading account. A common factor attached with the share market is volatility, where the prices of the stocks fluctuate; sometimes upwards and otherwise downwards. Hence, Investors in the share market must be prepared for unfavourable conditions, such as a falling market. A falling market, also known as a bear market, is used to refer to a financial market that is currently on a downward trend.
Falling markets are often viewed as the worst-case scenario for most investors in the stock market. However, there is another perspective to falling markets whereby they are also considered an ideal opportunity for new investments. Trading in a bear market requires patience, research and most importantly, the right amount of market knowledge. To aid you in making the right investments during a falling market, here are a few important pointers you should keep in mind:
1.Perform Thorough Research:
It is always important to research the fundamentals of a company that you are looking to invest in. But when the market is in a particularly bearish trend, this research becomes paramount. Once you have narrowed down your choice of stock, it is wise to spend an ample amount of time and effort going over its management, business outlook, and overall financial performance.
Generally, companies with high growth potential are considered favourable investments. However, during a bear market, a range of companies with typically low growth potential might witness an increase based on their good quarterly performance. Doing thorough research along with fundamental analysis can reveal new equity opportunities.
2.Heed the “Buy Low Sell High” Advice:
The stock market principle of buying shares when the stock price drops and selling them when the price rises stand true for a bear market as well. In normal conditions, falling stock prices can mean many things, such as the company’s fundamentals being on a decline or market sentiment being poor.
However, investors can buy even high valuation companies with good quality stocks below average purchase prices during a bearish trend. This can provide unique opportunities to buy undervalued stocks and earn significant gains.
3.Value your Margin of Safety:
Investors who value mitigating their market risks place great importance on the concept of Margin of Safety, or MOS. The margin of Safety is essentially the difference between a share’s market price and the investor’s estimation of its actual, intrinsic value.
You can set your Margin of Safety based on your risk appetite accordingly. In particular, the Margin of Safety can serve as the point of difference between one stock and another during a falling market. It can offer you certain ease of mind to know that you are maintaining a comfortable Margin of Safety for your investments even during a bearish trend. Thereby mitigating the chances of huge losses by a hefty margin.
4.Be Patient and Follow Your Instinct:
During a bear market, the prices of stocks may fall sharply, and investors can panic and sell their shares to further cut their losses. For instance, your friends and relatives might be panic-selling and encouraging you to do the same. However, keep in mind that every investment portfolio is different.
Instead, it is recommended to stay patient, keep a keen eye on the fundamentals of your investments and act as required. If you plan to hold your investments over the long term, it might be more prudent to hold onto them until the downtrend subsides. It is a common principle that good stocks often come out of a bearish market in the long run, and being patient can ensure you stay profitable in the long term.
Conclusion
A bear market might appear disappointing to investors but can be turned into an opportunity with ample skills, research, and the right tools at your service. As an investor, it is best to tread with caution and ensure that you are prepared to meet the unpredictability and volatility of bearish trends. Moreover, it is always beneficial to have the industry’s best Demat and trading account. For an ideal Demat and trading account with unique features, open a Demat account as well as a trading account with IIFL.