While economists might quibble over the exact definition of a bear market, most financial professionals consider a 20 percent drop in the market from its previous high to be a pretty good indicator that the market is down. If you can manage to pick the bottom of a down market, you can make a lot of money trading stocks. The problem is, few investors actually pick the bottom, and those that do are probably more lucky than smart.
Supply and Demand
Supply and demand are the primary factors that drives market prices up or down, and the stock market is no exception, according to the New York Stock Exchange. If there are more stockholders who want to sell their stock than there are investors who are willing to buy, the price per share drops, driving the stock market down. Plenty of factors can influence supply and demand, including company performance, positive or negative news about specific companies or industries, world events and political changes.
Down Market Potential
It is possible to make greater returns during a down market than in an up market, for the simple reason that stocks have the potential to move higher from a lower starting point. For example, a $1,000 investment at the stock market's peak in 1929, just prior to the start of the Great Depression, would have been worth only around $170 by the time the market bottomed out in 1932. But if you had held on to your stocks until 1959, around 30 years, your original investment would be worth more than $9,500, for a total annualized return of around 7.8 percent. If you had waited and invested that $1,000 at the bottom of the market in 1932, your total annualized return by 1959 would have been 16 percent, according to the CNN Money website.
Buy and Hold
Whether you buy stocks in an up market or a down market, you are more likely to earn strong, positive returns if you buy stocks for the long haul. One factor that impacts the buy-and-hold investment strategy is the sales charge on stock trades. Every time you buy or sell stocks, you have to pay a commission, which affects your profitability. According to the Securities and Exchange Commission's Investor.gov website, investors are more likely to achieve positive results by holding stocks for long periods of perhaps 15 years.
Down markets can present opportunities for buying the stocks of good companies cheap, but prospecting for a gem offers its own set of challenges. If you don't know how to read a financial report or have little experience with market trends, you might need the advice of an expert. You can gain both professional management of your investment dollars and a diversified portfolio of stocks by investing in a good-quality mutual fund, rather than trying to pick individual stocks.
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- stock chart image by selim kisa from Fotolia.com