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. Investors in the share market must also 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.
For the most part, 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.
Having said that, making the most of your investments in a falling market requires more than an efficient trading account. It requires patience, research and most importantly, the right amount of market knowledge. In order to aid you in making the right investments during a falling market, here are a few important pointers you should keep in mind:
Do A Thorough Round of 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 on your choice of equity, make sure to spend an ample amount of time and effort in going over the management, business outlook and overall financial performance of the company.
As a general rule, companies with high growth potential are considered favorable opportunities. However, during falling markets, a range of companies with typically low growth potential might witness an increase. Keeping a look out and conducting fundamental analysis like this can reveal new equity opportunities.
Heed the “Buy Low Sell High” Advice:
The classic recommendation of buying shares when purchase price drops and selling them when the price rises, stands true for falling markets as well. In regular conditions, falling purchase prices for a stock can mean a number of things. The fundamentals of the company could be on a decline or market sentiment could be poor.
However, during falling market conditions, this might not be the case. During a bearish trend, even high valuation companies with good quality stocks can be bought below average purchase prices. This can result in unique opportunities to earn significant gains.
Value your Margin of Safety:
Investors who value mitigating their market risks place great importance on the concept of Margin of Safety, or MOS. Margin of Safety is essentially the difference between the market price of a share, and the investor’s estimation of its actual, intrinsic value.
Based on your risk appetite as an investor, you can set your own Margin of Safety accordingly. In particular, during a falling market, the Margin of Safety can serve as the point of difference between one stock and another. It can offer you a certain ease of mind to know that even during a bearish trend, you are maintaining a comfortable Margin of Safety for your investments.
Be Patient and Follow Your Own Instinct:
When things get chaotic during a falling market, it can be tempting to jump on the bandwagon of any ongoing trend in the market. 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 own investments and act only as required. If you plan on holding your investments over the long run, it might be more prudent to hold onto them till the downtrend subsides. Remember that often, good stocks can come out of bearish markets and you would want to be prepared for the bullish market that will inevitably follow.
Falling markets might appear disappointing, but with ample skills, research and the right tools at your service, it can be turned into an opportunity. As an investor, it is best to tread with caution and ensure that you are prepared to meet the unpredictability of bearish trends. Moreover, it is recommended that as an investor, you must rest assured that you have some of the best demat and trading accounts in the industry. To that end, look no further and open a demat account as well as a trading account with IIFL, one of the most prestigious financial institutions in the country.