Making money in the stock market is relatively easy when the markets are rising compared to when they are falling or are sideways. As the market falls, many of you might begin to sell your holdings in a panic. However, that's not a good strategy.

A downward-trending market is a market that has fallen by 20% or more. It lasts for almost 2 or more months. This happens when there are a lot of investors who want to square off their positions in the market. Due to this pessimism, a herd behaviour of selling is observed in the market which also leads to a fall in the market.

When the market starts to decline, whether a crash, a bear market, or just a temporary dip, you need to stay calm and avoid following the crowd.

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Although falling prices can affect your portfolio, the level of risk you face depends on your specific investment goals. If you’re a long-term investor, there’s usually no need to worry about a market downturn. Your focus is on the overall growth of the stock market, which has historically risen over time, despite occasional dips.

So even if the Nifty 50 were to drop by nearly 2000 points, it would still be higher than it was 20 years ago, despite two bear markets in that period.

If you have a short term focus, you can consider hedging your portfolio to protect against short-term market drops. However, hedging isn’t for everyone. It depends on your risk tolerance and available capital, as hedging requires managing multiple positions.

Market downturns and bear markets also offer profitable opportunities. By using derivative products, you can speculate on both rising and falling markets. However, it's riskier than you can imagine.

Here is a bunch of things you can do in a falling market:

Profiting from a Declining Market with Short-Selling

One of the most common strategies to profit from a declining market is short-selling. The approach to short-sell can vary based on the market you’re trading in and the type of product you use.

This involves borrowing shares (or other assets) from your broker and selling them at the current market price. If the market experiences a sustained decline, you can later buy back the shares at a lower price, return them to the lender, and pocket the difference as profit.

Buying at the Bottom of the Market

When the stock market declines, both strong and weak stocks often lose value. However, strong companies are more likely to recover which is a buying opportunity for many customers.

Once you’ve identified a stock that’s reached a fair valuation, you can buy in. Remember that the stock may not rebound immediately, but if your analysis is sound, you can be confident it will recover over time.

Going Long on Defensive Stocks

You can diversify your portfolio by adding defensive stocks of companies that produce essential goods and services, like food, beverages, and utilities. These stocks are less affected by economic downturns.

During economic growth, investment flows into cyclical stocks, which produce non-essential goods. But when the economy declines, the focus shifts to consumer staples.

Trading Options for Downside Protection

Options can be used for speculation or as a hedge against falling prices. Two common strategies are buying put options and writing covered calls. Buying a put option gives you the right to sell shares at a predetermined price, protecting you if the stock’s value drops. Writing a covered call involves selling a call option on stocks you own, which can generate income during a market decline.

Trading Safe-Haven Assets

Safe-haven assets like gold and silver maintain or even increase in value during market declines, as they are negatively correlated with the broader economy. Investors and traders often turn to these assets for protection during downturns.

You might take a long position on a safe-haven asset to hedge against market declines.

Inverse ETFs: A Different Approach to Short-Selling

An inverse exchange-traded fund (ETF) is designed to gain value when the underlying benchmark declines. Instead of borrowing an asset to sell, you’re buying a fund that profits from a market downturn. However, Inverse ETFs are not yet present in the Indian stock market.

Conclusion

Apart from the strategies discussed above, you can also consider parking extra funds in PPF, NSC, Post Office Monthly Savings Scheme, and the National Pension Scheme (NPS) as these also focus on wealth building.

These schemes are supported by the central government. There are numerous opportunities for you to grow your wealth, even when the markets are not performing well.

So plan your portfolio wisely and stay ahead of any probable downward market trends.

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