Bull and Bear Market Strategies

The stock market often falls under the conditions of the so called bull and bear markets. Intelligent investors are well familiar with the conditions of both and know exactly what to do.

The names of the two market conditions are used in order to imply the effect that these markets may have on the value of your stocks.

The stock market hides its risks in terms of devaluating your stocks when the prices are down. However, an educated investor should be familiar with the difference between a decline in the market and a general problem with the stocks.

There are many examples which show that even under the conditions of a bear market some types of stocks perform well. The same is true under the conditions of a bull market. On the other hand, some stocks do really suffer from such extraordinary market conditions.

Why is that? The major reason for this is that stocks don't respond equally to the rises and falls of the market.

If you have done an educated investment that was based on thorough preliminary analysis you will be in an advantageous position relative to an investor that has invested in stocks just like that.

The difference between a trader and an investor is that the latter invests in a particular company stock because he likes the company and its activities. S/he is well informed and attached to the company. That is why in bad market conditions the investor will be able to tell whether the decreasing price is in accordance to the decreasing market trend or there is a problem within the company that drives the price down.

What to Do?

Under a down market you have several options. One of them is to sell immediately in order to minimize your losses. Another option is to let the market work its way through the problem with no action from your side. A third option is to benefit from the stock decline and add some more to your portfolio. But, this should be done only if you don't perceive that there is something wrong with the company that has led to the stock decline.

A bull market may make your stock's price increase, from which you can benefit in one way or another. However, the possibility of your stock becoming too costly always exists since after the up a down in the price may follow, which may be of an extreme speed.

So, under bull market conditions you can do one of the following in order to counteract the potentially negative effects.

First of all, you can sell a part of the shares and use the money to repurchase the stock when its price falls again. Secondly, you can leave the market work its way through the imbalance. Thirdly, you can take advantage of the high prices and sell the stocks for a profit.

Never forget that a market correction will follow that may push the price of your stock below its initial level.

A useful strategy to counteract the negative effects of a bull market is to sell a portion of your stocks at the current bull market price, which will be greatly higher than the one at which you have purchased the stock. After the market correction is at place you can use the money you have acquired from the bull market sale to purchase shares at the current lower price. As a result you will have more stocks than you used to have before the bull market. You have not only avoided losses but also have reduced your average cost per share.

Final Piece of Advice

Never forget that it is important to base your decisions on knowledge not on feelings. This means that being educated about the company and the industry from which your stocks come from, the market conditions under which you operate will be of small importance to you.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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