Anybody can make money in a bull market when stocks are heading up, but it takes strategic proactiveness to book profits when stocks are heading south in a bear market. In reality, people make and lose money in both bull and bear markets—in fact, all traders, irrespective of trading skills and experience will lose money at different times. The key to being a successful trader is to have more winning trades than losing trades. This piece provides simple actionable tips that can help you improve your trading profits irrespective of the general direction of the stock market.
Here’s how to make money in bull markets
A growing economy and optimistic investor outlook are recipes for a bull market in the stock market. Positive market sentiment encourages current investors to hold on to their stocks, the stability encourages new investors to enter the market, and the fact that more people are buying than selling stocks eventually causes stock prices to continue a consistent uptrend. Below are tips for maximizing your gains in a bull market.
1. Take long positions
A long position is probably the simplest trading decision—you buy a stock when it is selling at a low price and sell it when the price is high—you profit on the difference between your cost and selling price less transaction fees. A key point to know when taking long positions based on fundamentals is to buy the rumor and sell on the news.
2. Buy call options
If you don’t want to put too much money into stocks upfront, you can play derivatives by purchasing call options. A call option gives you the right but not the obligation to buy a stock at a given price by a specific date. As the price of stocks rises, the value of the call option rises. When the price of the stock goes higher than the strike price of the call option, you can exercise the option to buy the stock at a lower price that it’s prevailing market price. You can also sell the call option for profit in the open market.
3. Make long ETFs
If you want to avoid the transaction costs and operating expenses associated with stocks, you may want to consider playing a bull market with long ETFs. ETFs typically track the performance of the general stock market but by replicating the movement of the indexes they are following. If the Dow Jones Industrial Average climbs 25 percent, you can expect its ETF to rise by a similar amount and you don’t have to worry about picking individual stocks in the index.
Here’s how to make money in bear markets
A bull market doesn’t continue indefinitely, and the market will eventually go into a downturn in which stock prices are crashing. When stock decline five percent, the market considers it a pullback when the market loses 10 percent, the market calls it a correction—by the time the market is down 20 percent, both traders and investors know it’s a full-blown bear market. Below are three tips for making gains in the bar market.
1. Short sell the market
Selling the stock market short essentially means borrowing shares, selling them at the current price with the anticipation that prices will fall lower so that you can buy them at a cheaper price. If the price of stocks falls as anticipated, you’ll be able to buy and return the stocks you borrowed while keeping the difference between the price on your original purchase.
2. Put options
A put option gives you the right but not the obligation to sell a stock at a predefined price at a given price by a given date. There’s an inverse relationship between a put option and its underlying asset. The value of a put option will rise as the value of the underlying asset falls; hence, you can sell the put option once its strike price is higher than the market price of the stock.
3. Short or inverse ETFs
The performance of a short ETF or an inverse ETF is inversely related to the performance of that ETF. For instance, a short ETF of the S&P 500 will rise by 25 percent if the S&P falls by 25 percent. Hence, if you technical and fundamental analysis suggests that stocks are in for a downturn; a short ETF might be a smart way to short the general market without shorting individual stocks.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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