A Bear Market Explained

In 2021, 56% of people had an active interest in investing. It can be an excellent way to make some extra income to put towards your future. But, with all the different terminology surrounding investing, getting started in investing can be difficult to do.

You’ll hear the term “bear market” used frequently in investment circles. It describes a particular kind of market investors could find themselves dealing with.

Whether you’re an experienced investor, or just getting started in the exciting world of investing, knowing what a bear market is can be a great advantage. 

To learn more about what a bear market is and the different types of markets you could deal with as an investor, keep reading below. 

Bear market displayed with trending lines downward toward baxia markets time symbol

What Is a Bear Market?

A bear market simply describes a situation when there is a slump in investment prices. This can worry even the most experienced investors.

More specifically, a bear market is when there is a significant 20% decline in securities prices. When these stock prices fall 20% and stay that way for a prolonged period of time, a bear market is occurring. 

A downturn in the market can seem like a bad thing. And while it isn’t an ideal situation, there are positives to a bear market.

It can mean there is more opportunity for investments that had previously been too expensive to purchase. Bear markets also offer the opportunity to learn from past investment mistakes and become a more skilled investor.

Does a Bear Market Only Matter for Stocks?

While the term bear market is simply a way for investors to let the world know that the stock market is in a decline of 20%, a bear market shouldn’t only be talked about in terms of stocks.

This is because the key of 20% is, to a degree, random. If a market is in a decline of 17% for a sustained period, it could still be considered a bear market.

However, a market would not be considered a bear market if prices fell by 20% and rose again very quickly. What seems to underline the conditions needed for a market to be called a bear market is that it is a consistent drop in price for a long time. 

A chief investment strategy is to pay close attention to the market and the fluctuation of prices. This allows you to make predictions about whether a bear market could occur. Keeping an eye on the changes in Wall Street is always a good idea for investors. 

What Causes a Bear Market?

Bear markets are caused by several different factors. However, if there is a country or even worldwide event that damages the economy, you can be fairly certain that a bear market will follow.

The recent pandemic is a good example of this. In general, people were spending less money because they were spending less time out of the house. Certainly, there were exceptions to this; for example, streaming services.

However, the value of flights fell to an exceptionally low level because people were unable to travel. And this happened to the market overall, resulting in a bear market. The value of assets that had been fairly secure for some time fell because no one was buying (and therefore, investing) in them. 

Pandemics are not the only event that can cause a bear market. Wars are another reason they can occur, even if the war does not affect every country. Events such as World War II affected the economy in this way. 

If a government passes a policy that impacts the economy, a bear market can occur. For example, if changes are made to the ways corporations or people are taxed it may cause an economic shift. 

Changes to the economy can also cause bear markets, even if the changes are intended to be good. One example of this is when an economy shifts online.

The Dot-com Bubble is just one example of this, as investors poured money into internet start-ups in hopes of making a quick profit. This triggered a bear market and, eventually, a recession. 

What Are the Key Characteristics of a Bear Market?

As with any area of the economy, making predictions about when a bear market can or will happen is not always possible. But paying attention to the characteristics of a bear market may help you prepare for one.

Knowing and understanding the circumstances that occurred before a previous bear market can also be beneficial, as can understanding how bear markets occur. 

You will know you’ve entered a bear market when the value of stocks begins to decline. People start to buy less, and in turn, companies lose out on profits. This is important as it can lead to less employment and can be damaging to the economy.

Another common sign of a bear market is when investors generally become doubtful about the strengths of their investments. Newer investors especially, may start to panic and sell off their investments as quickly as they can. Some may simply wait it out, focusing their time on other investment interests that are less volatile. 

As companies and corporations are earning less during a bear market, more employees may start to face losing their jobs. This is so that the company can increase profits as much as possible and limit the resources they are spending.

It’s a risky game; bear markets often crawl back and companies begin to grow again, leading to more work that can’t be done due to a lack of employees. 

Generally, some kind of turnaround happens. After all, that is the nature of the economy. Reduced profits and money market flow lead to interest rates being lowered, and this can increase spending again.

People may begin to have confidence in the economy towards the end of a bear market, causing markets to heal and grow once again.  

Price changes that can result in a bear market can be seen through close analysis of the Nasdaq Composite and the S&P 500 Index.

What Is the Difference Between a Bull Market and a Bear Market?

Along with the bear market term, you may have also heard of a bull market. A bull market is essentially the polar opposite. In a bull market, prices are rising, and buying shares and stocks is encouraged.

During a bull market, investors are usually fairly confident in their purchases. This leads others who may not be as familiar with the market to also try their hand at investing, again pushing prices up. 

A bull market is generally defined as a 20% market price increase over a prolonged period. It often accompanies a strong and flourishing economy.

These kinds of economies can result from better political leadership and a better level of employment. Strong GDP also generally brings about a bull market. 

Whatever kind of investor you are, knowing the differences between these two important terms will help you make more informed decisions. 

How Long Does a Bear Market Last?

The length of a bear market usually depends on how quickly an economy can bounce back from damage. However, some expert investors have concluded that, on average, most bear markets typically last for just over a year. 

Researching a particular stock index and seeing when this index enters a better price on financial markets helps investors see when a bear market is being corrected. 

Recovering from a bear market, however, is a different story. It comes down to how much damage was done during a bear market. But usually, an economy can take up to four years to fully recover and return to the strength it had before the bear market. 

Does a Bear Market Always Lead to a Recession?  

The short answer, thankfully, is ‘No.’ A bear market won’t always result in a recession, and if an economy can return to normal after a bear market, a recession shouldn’t occur.

However, bear markets should always make potential investors wary of a recession. They can be used as a predictive sign that one could be on its way. If a market is heading towards bear market territory, investors will be on their guard and, perhaps, ready to sell. 

As the S&P 500 closed in a bear market in June, investors have been conscious that a recession could be coming. This would not be surprising following the impact of the Coronavirus on the economy.

Understanding the Bare Necessities of a Bear Market Will Help You on Your Investment Journey

A bear market is an important part of investing, even if it is something that investors would rather not have to deal with.

Whether you’re planning to invest for the short term or the long term, being aware of bear markets will allow you to make better choices for your investments. 

If you would like to understand more about financial markets and tools used to take your investing journey to the next level, click here to see more articles. When you are ready to start trading, you can start a risk-free demo account or live account with Baxia Markets by signing up here

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