What is a bear market and how to know about it?

What Is a Bear Market?

by Raja Mehar

You might be thinking of what is a bear market I got a simple answer: A bear market occurs when prices fall for an extended period. It usually refers to a situation in which stock prices have fallen by 20% or more from recent highs due to widespread pessimism and negative investor sentiment.

Bear markets are frequently associated with declines in an overall market or index. Such as the P 500, but individual securities or commodities can also be considered in a bear market. If they experience a 20% or more significant decline over a sustained period. Typically two months or more.

Understanding Bear Markets

In general, stock prices reflect future expectations of a company’s cash flows and profits. Stock prices can fall as growth prospects deteriorate and expectations are dashed.

According to one definition of a bear market. Markets are in bear territory when stocks have fallen at least 20% from their highs. This type of market can last for months or years as investors avoid speculative bets favoring safe bets.

Bear markets can last for years or just a few weeks. A secular bear market can last anywhere from 10 to 20 years and is distinguished by below-average long-term returns. In contrast, a cyclical bear market can last a few weeks to a few months.

Phases of a Bear Market 

Bear markets typically have four distinct phases.

  1. High prices and strong investor sentiment distinguish the first phase. Toward the end of this period, investors begin to exit the markets and take profits.
  2. In the second phase, stock prices fall sharply. Trading activity and corporate profits fall and previously positive economic indicators fall below average. As sentiment begins to deteriorate, some investors start to panic. This is known as capitulation.
  3. Speculators begin to enter the market in the third phase raising prices and trading volume.
  4. Stock prices continue to fall slowly in the fourth and final phase. As low prices and good news entices investors again, bear markets begin to give way to bull markets.

Bear Markets vs Corrections

The bear market is not confused with a correction, a short-term trend lasting less than two months. While revisions allow value investors to enter the stock market. Bear markets rarely provide entry points. This barrier exists because determining the bottom of a bear market is impossible. Trying to recoup losses can be tricky unless investors are short-sellers or using other strategies to profit.

Short Selling in Bear Markets

Short selling allows investors to profit during a bear market. This method entails selling borrowed shares and repurchasing them at a lower price. It is a hazardous trade. Before placing a short sell order. A short seller must borrow the shares from a broker.

Puts and Inverse ETFs in Bear Markets

A put option grants the owner the right. But not the obligation to sell a stock at a specific price on or before a particular date. Put options can speculate on falling stock prices and protect long-only portfolios from falling prices. Inverse ETFs are intended to move in the opposite direction of the tracking index.

Read More About credit cards without cibil scores

Related Posts

Leave a Comment