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When happens in a bear market?
25 May 2022 (1238 views)  

We are experiencing a bear market. 

The stock prices keep falling, way below their fair values.

What is happening?

Many investors hold stocks on margin or leverage. When the stock prices fall below a certain level, they are required to top up the margin. If they are unable to do so, they have to sell their stocks.

In a bear market, there are few buyers. The forced seller will be down way below the fair value of the stocks. 

This situation is worsened by the actions of short sellers. They sell the stocks (which are borrowed from other investors) at the depressed prices and will buy them back at a lower price. They profit on the difference in prices. 

The short sellers have only a small time frame, maybe a few days or weeks, to buy back the stocks and cover their positions. During this time, the prices continue to fall in a panic. 

The investors who have bought their stocks without margin do not have to worry about the depressed prices. These prices will recover when the short sellers cover their positions. They can wait for the stock prices to come back to the fair values, which is based on the future profits generated by the business. 

Indeed, for investors with spare cash, it is a good time to pick up the stocks that are selling at depressed prices. They will benefit from the rebound.

Be patient. Do not panic. Do not sell at depressed prices, which are way below the fair value of the stocks. 

Tan Kin Lian


When happens in a bear market?
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We are experiencing a bear market. 

The stock prices keep falling, way below their fair values.

What is happening?

Many investors hold stocks on margin or leverage. When the stock prices fall below a certain level, they are required to top up the margin. If they are unable to do so, they have to sell their stocks.

In a bear market, there are few buyers. The forced seller will be down way below the fair value of the stocks. 

This situation is worsened by the actions of short sellers. They sell the stocks (which are borrowed from other investors) at the depressed prices and will buy them back at a lower price. They profit on the difference in prices. 

The short sellers have only a small time frame, maybe a few days or weeks, to buy back the stocks and cover their positions. During this time, the prices continue to fall in a panic. 

The investors who have bought their stocks without margin do not have to worry about the depressed prices. These prices will recover when the short sellers cover their positions. They can wait for the stock prices to come back to the fair values, which is based on the future profits generated by the business. 

Indeed, for investors with spare cash, it is a good time to pick up the stocks that are selling at depressed prices. They will benefit from the rebound.

Be patient. Do not panic. Do not sell at depressed prices, which are way below the fair value of the stocks. 

Tan Kin Lian