Stock Market Crash: 5 ways to make money in a Bear Market.
Last Wednesday, the US Federal Reserve increased its interest rate by 50 basis points, causing investors to worry about a slowing economy and possible recession. Consequently, Dow Jones Industrial Average dropped more than 1,000 points on Thursday, with Nasdaq which is heavy on technology taking a 5% hit.
Although the Nigerian stock market is not likely to be affected due to large domestic participation in the market, it is important to be prepared for such eventualities and hedge your investment against losses and even earn profit in the process.
But first, what is a Bear Market?
When you hear Bear market, what comes to mind? A heavily built, short-tailed mammal with large skulls large, strong paws, long claws, and strong jaws? Nah…A bear market is simply a period in which stock market prices keep falling. In a bear market, investors panic and run for dear lives. When stock prices register a consistent fall of 20%, it signals a bear market. This usually means the stock market is in for a hard time.
Here are 5 ways you can safeguard your investment from losses when the bears are out to play.
1. Buy Quality Stocks: When everything in the market is down, it indicates that good stocks are being thrown out with the bad. This is a good time to hunt for quality stocks that tend to recover quickly and get back on the growth track. Do your research well, as it is important at this point to keep your purchase of bad stocks at a minimum because when bad stocks decline, their price keeps falling and may never recover.
2. Go for Dividends: Stock price is determined by buying and selling in the stock market (market activities), whereas dividend is determined by the company’s net income. When the stock price falls due to market activity, but the company remains robust, profitable, and pays a dividend, it can hedge your investment against market losses. This year kicked off with a flurry of companies announcing impressive financials and declaring juicy dividends. MTNN, Airtel, Guinness, Nestle, and a slew of other companies in Nigeria have a history of paying dividends. Find out the full list of dividends declared in 2022. Buying high-quality dividend stocks can help you “weather the storm” and help to hedge against inevitable short-term downsides in the equities market. Click here to start buying dividend stocks.
3. Diversify Your Portfolio: A diverse portfolio can help you mitigate risk. If one set of stocks underperforms, the others can help boost your earnings. A sector rotation strategy could also help you avoid downturns in specific sectors. Adding exchange-traded funds (ETFs) to your stock portfolio can help you diversify and adopt a sector rotation strategy. Different sectors perform well at different phases of the economic or business cycle. For example, when an economy is thriving, companies that sell big-ticket items like cars, machines, high-tech, home remodeling, and other large purchases, as well as their stocks (which are known as cyclical stocks) do very well. However, when the economy appears to be sputtering and heading for a recession, the smart thing to do is to shift to defensive stocks related to consumer goods such as food and beverage (in the consumer staples category), utilities, and the like.
4. Buy the Dip: In a bear market, stock prices drop significantly. As earlier mentioned, quality stocks will always bounce back, so this presents an opportunity to buy at a low price. But what if you wish to buy a quantity you cannot afford?
Use margins.
Buying on margin means borrowing money from a broker to purchase stock. Consider this a loan from a broker to buy stocks that you otherwise could not afford, with the hope that your stocks will rise in value enough to pay back the loan plus interest. This facility can be risky but can also be a powerful tool if used right.
5. Invest for the Long-term: Remember that good stocks emerge from bear markets and are usually well-positioned for the subsequent bull run. So, don’t be so quick to sell a stock. The key here is patience. Short-term volatility does not matter for long-term investors. If you have many years until retirement, a bear market should not worry you. What you need to do is keep an eye on the company’s vital statistics (growing sales and profits, for example), and if everything appears to be in order, then hang on. Continue to collect your dividend and hold the stock as it zigzags into the long term.
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