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.
It definitely is possible to make greater returns during a down market than in an up market, because stocks have the potential to move higher from a lower starting point. Market plunges are buying opportunities for some investors.
Supply and Demand
Supply and demand are the primary factors that drives market prices up or down, and the stock market is no exception. 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, suppose you invested $10,000 in the S&P 500 at the very bottom of the 2008-2009 financial crisis which occurred in March 2009. At a low of $67.95 per share, you could have bought 147 shares. Some 10 years later, the S&P 500 was trading around $288 per share, for a 324 percent gain.
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, investors are more likely to achieve positive results by holding stocks for long periods of perhaps 15 years.
Stock Market Considerations
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.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.