Due to the Coronavirus global outbreak, economies around the world are under stress. The main reason most of the market experts are pointing out is the downtrend of the economy of the country where the virus outbreak originated in i.e, China. Every country in one way or the other is associated with China as their trading partner, so it is natural the world economies are under effect & India is no exception. The Indian stock market has officially entered into "bearish" mode as both Sensex & NIFTY taking a downward slump.
On the health front, people around the world are taking necessary precautions to prevent the spread of the virus. On the finance front, DigiReload lays down 5 strategies to make profit in bear market in economic slowdown:
Invest In Index Funds
An index is a group of securities defining a market segment. These securities can be bond market instruments or equity-oriented instruments like stocks. Some of the most popular indices in India are BSE Sensex and NSE Nifty. The stocks associated with these indices are viewed as reliable because of their low volatile nature.
The profit is gradual but still, investors invest in these funds because of the security & low expense incurring funds as they are not actively managed funds & perform in accordance with the index which they are associated in.
Invest In Short Term & Long Term "Put"
A put option is bought if the trader expects the price of the underlying to fall within a certain time frame. The buyers can mark their "strikeprice" i.e, the price at which they would like to sell their stock. Unlike a call option, a put option is typically a bearish bet on the market, meaning that it profits when the price of the underlying security goes down.
The benefits of betting on the PUT option is:
- Reduces risk of price decline
- No margin deposit required
- Provides some leverage in obtaining credit
- Established price helps in production management decisions
- Buyers may be more accessible
- Greater flexibility in canceling commitment
Target Good Stock At Low Prices
In a bear market, the stocks of both good and bad companies tend to go down. But bad stocks tend to stay down, while good stocks recover and get back on the growth track. When a bad stock goes down, the stock often goes into a more severe decline as more and more investors look into it and discover the company’s shaky finances. Many folks would short the stock and profit when it continues plunging.
Target the sectors which are somewhat immune to the slowdown like Pharma, Public Sector Banks.
Diversify Your Investment Sector
It is advised that the investors investing in Exchange-Traded Funds use a combination of sectors to invest in the market. The idea behind this ideology is to minimize the risk as your investment is scattered over different sectors. When the economy is doing well, companies manufacturing autos, high technology, luxurious items, tend to do well & their stocks too.
However, when the economy looks like it’s sputtering and entering a recession, then it pays to switch to defensive stocks tied to human needs, such as food and beverage (in the consumer staples sector), utilities, and the like.
So it is always suggested to rotate your ETF's in the different investment sectors.
Use Margin Feature
Simply put, if you are borrowing money to buy securities, it is termed as buying on margin. Margin is the money borrowed from a brokerage firm to purchase an investment. It is calculated as the difference between the total value of securities held in an investor's account and the loan amount from the broker.
The whole process includes buying an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or broker. The broker acts as a lender and the securities in the investor's account act as collateral.
Many investors don’t use margin, but if you use it wisely, it’s a powerful tool. Using it to acquire dividend-paying stocks after they’ve corrected can be a great tactic.
Margin is using borrowed funds from your broker to buy securities (also referred to as a margin loan). Keep in mind that when you employ margin, you do add an element of speculation to the mix. Buying 100 shares of a dividend-paying stock with 100 percent of your own money is a great way to invest, but buying the same stock with margin adds risk to the situation.