Are you scared that the market will collapse or worried that you might lose all of your investments in the next bear market? You’re not alone. In fact, these are worries that most investors have or at least experience at some point. But don’t worry, there are ways that you can protect yourself against a collapsing market and acts that you can take in order to limit your losses when a bear market happens. And we can teach you all about it.
Find the best trading platform. You capital is at risk when trading. Be careful.On the following page, we’ll walk you through the ins and outs of adapting to an ever-changing market, and we’ll provide you with the best tips on how to not go bankrupt when the market turns. Some of the tips are focused on how minimizing the risk revolving your investments while others focus on how you can make money in a bear market.
What To Do in A Bear Market?
When the inevitable happens and the company shares you’ve made money on stagnate or even start to fall, you need to act swiftly and try to stay calm. At the point where a market turns from being a bull to a bear, investors either focus and start with damage control, or they lose control and end up at the bottom. It’s up to you do decide how you will react and what you will do.
Avoid Stocks at all Cost
The first and most obvious thing to do when the stock market turns is to drop whatever stocks you have and try to protect your funds. We’ll talk more about how to protect your money in a bit, but first, let us explain why stocks can be so dangerous.
When the stock market turns things can go really bad and it can happen quickly. You see, unlike other assets, stocks are very vulnerable, and if the company behind the stock goes bankrupt, you might lose all of your invested money. That’s why you need to avoid being involved in a company when their shares reach zero.
Other assets such as commodities and currencies never really reach zero because they will always keep their value. In certain cases, a currency could collapse and be replaced by a new one, but this is very unusual, especially considering how controlled today’s foreign exchange market is.
Because of this, you need to realize and accept when it’s time to jump ship and abandon whatever stocks you own. Even if most companies usually survive a market crash, it’s always better to be safe rather than sorry.
In fact, let us take this one step further. In order to ensure that you’re not stuck at the bottom when the market turns, we advise you to start selling your stocks as soon as the market indicates that it’s about to switch. Don’t wait. Protect yourself.
But what about your funds? Should you keep the cash or reinvest it? It depends, but let us take a look.
Invest in Gold to Safe Keep Your Funds
How to remain safe and potentially prosperous during a market crash.
Let’s assume that the stock market has turned bearish. Prices are falling, investors are fleeing, and everything is indicating that we are about to crash. What do you do?
One of the most popular ways of handling this is to reinvest one’s capital, and gold is usually one of the safest bets.
Over the last several centuries gold has played an important role in our society and even still today, gold represents wealth. And because of this, gold rarely drops in value, at least not to any catastrophic levels. Like any other asset, gold fluctuates in price, but it rarely free falls and that’s why many people protect their funds and invest in gold.
As a matter of fact, gold has a tendency to surge when the stock market falls which means you can even make a profit while the stock market is collapsing.
So, our first lesson in capital protection is to buy gold as soon as you’re not feeling comfortable with the stock market.
Note that certain other commodities can act in a similar way, for example, silver. Although, most commodities – especially consumer based ones like food products and oil – tend to fall simultaneously with the stock market.
Look for a “Safe” Index or Instrument to Secure More Funds
In addition to gold, some people try to protect their funds using other safer instruments. Stock indices might not sound like the most logical solution but under the right conditions they can act as an insurance, and by rotating your portfolio you can protect your funds.
While stocks have the ability to drop to zero, well-planned indices usually don’t since they consist of several stocks. In fact, a diverse enough index could even rise in price during a brutal market crash as long as a majority of the listed companies aren’t falling.
With that said, reinvesting in an index is far from as safe as using gold because the truth is you never know what will happen and even if it’s highly unlikely, an index could theoretically reach the bottom too. Also, when the market starts to turn, indices are usually the ones that get hit the worst first. Meaning you shouldn’t protect yourself in an index until it’s already too late and until you can kind of see where the bear market is headed and which companies will take the blunt force.
Hedge Trading to Minimize Losses
Another more hands-on approach to how one can deal with a collapsing market is hedge trading.
Hedge trading is, in fact, a strategy that many day traders use to protect themselves on daily basis and to ensure that they make use of as many opportunities as possible.
The idea is that you open several trades or in this case place several investments in different markets to “hedge” your own position and protect yourself.
As mentioned, this is a more hands-on approach, and it does require a lot of attention and potentially action form you which means it’s not optimal for everyone. Although, if you have some time on your hands and you are willing to partake in some trading this is a great way to limit your losses, which brings us to our next point and tips on how to benefit from a bear market.
Short Sell Instruments Using Derivatives
Make money from a bear market!
Short selling is the act of betting against the market and benefiting from falling prices. You can read more about that in our comprehensive short trading guide. It can be done using regular stockbrokers and instruments, although we always recommend derivatives and more specifically CFDs for this.
There are two reasons for this. First and foremost, CFDs are easy to trade with and even easier to understand. They have also been designed to be used for short trading, and there are no extra fees or increased risks of using CFDs on falling prices. Secondly, CFDs are leveraged products which means you can maximize your trades and hedge your positions on the market further.
Now, if you’ve never traded using derivatives before there are certain skills you need to learn which we can help you with because trading is associated with risk, especially during unstable market conditions.
The basic idea is that you use these derivatives to bet on certain instruments’ failure and then make money when they fall. If the instrument ends up rising in value, you will lose money, but if you focus on collapsing stocks during a bear market, you can make a decent amount.
However, a bear market usually happens quickly, and you will likely not have the time to learn how to trade while the market is falling which is why we recommend you start learning now. Check out our guides on short selling, CFD trading, and especially CFD trading with stocks and start preparing yourself for the next bear market.
We can also help you find the best CFD broker to use and suggest you check out our detailed broker reviews to learn more about the top services and their products. All of our broker reviews are unbiased and based on facts and our own experiences with them.
Bear markets are inevitable and will always occur after a bull market so it’s something we all have to learn how to live with. With that said, a bear market is not something you have to be scared of or have anxiety about. By using a few simple techniques and making sure you are prepared, you can limit your losses substantially when the next bear market happens. In fact, if you’re ready when the market turns, you don’t have to lose anything at all, and by placing your funds in “safer” assets, you can protect yourself completely.
In addition, by learning a bit about short trading and CFDs, you can even make some money from a bear market. So, instead of being worried about what’s going to happen to you and your money the next time the market turns, we encourage you to plan and prepare for it. And who knows, maybe the coming bear market will turn out to be a lucrative opportunity for you.
Find the best trading platform. You capital is at risk when trading. Be careful.