Being a participant of stock market, it is essential to know a number of stock market related terms. One of such terms constitutes Bear Market. The correlation between correction and bearish market is to be known as well.
It is quite easy to get confused, and mix up both the terms. We have the right explanation which would probably provide the sense of right direction.
A price of stock falling alone is not a bear market, but the collective drop of a ton of stock. The index of a heavy number of stocks, when falls, and for a longer interval of time is bear trend.
What is a Bear Market?
The precise Bear Market Meaning is when the index, as explained before fall below 20%. Such a fall, which takes place after a peak price, and also lasts more than two months in duration, is bear market.
The reference is as well commonly made in relation with stocks from one sector or industry. Bear trend is also when the percentage fall in price is pretty steep.
On the contrary, when all such measures are not fulfilled, it is correction. That is, decline is not steep, or when the decline lasts for a shorter period, probably less than 2 months.
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Types of Bear Market or Bearish Market
The distinction is done on the basis of the time duration for which the downfall stays constant. We know the minimum down led percentage to have been considered bear market, and the maximum is differentiated.
Secular Bear Market
The average period considered as secular bear market is 10 years, which it may move up to 20 years. The returns of this period are way below average.
Rallies arise at times in this market condition, where profits may result, but range only for days or probably weeks. Misconceptions of bull market inception happen, but prices goes back to lower levels shortly.
Cyclical Bear Market
The normal time intervals are referred to as the cyclical Bear market. The time duration for this types starts within weeks and ranges up to few year.
What causes Bear Market?
Just like any other phenomenon, the reasons why a bear market takes place aren’t fixed. Fixed happenings are not a part, and the reasons often differ.
However, the past records of Bear Market Stocks can be revised to know what possible reasons led to the occurrence.
Major of all occurrences is a sluggish economy, i.e. slowing economy, lack of productivity, decline in employment etc. Government interference, in any aspects may as well lead to bearish market condition.
Any measures taken by government, such as changes in tax rates etc, are the government intervenes we are talking about. At times, when investor sentiments take shape, and demand takes a turn, bear market is as well deemed to happen.
How to Invest in a Bear Market?
Investors who encountered bear markets know the struggle and losses are real. However, diversification is regarded as the partial immunity, where investments when diversified would divert the losses.
Investing in such market condition is nevertheless has its own set of opportunity. Here is how you can Invest in Bear Market, in rightful terms, and gear up with profits.
- Investment should be done on good stock, on the contrary to the bad ones. It is because the good companies rise back strong, while the others continue lagging behind.
- Dividends are paid out of company’s income statements, while the prices depend upon demand. So, when the prices fall, and company is doing well enough, earning profits, you will receive you share in dividend.
- Diversification per sector wise is thoughtful. Performance of diverse sectors range, as per the circumstance, and hence stock prices are affected accordingly.
- When a bond bear market happens, individual bonds are safer than bond fund. The reason is, they provide the amount promised.
Phases of Bear Market
Bear market takes four different shapes, which leads to notion that states its four phases.
- Highest investor sentiments are witnessed here, where price soar up and above. The phase ends, when investor bank in all the profits, and withdraw from their investments.
- The withdrawal leads to a steep downfall of prices, and the profits and trading activity are hindered. Positive economic indicators, begin turning around, falling past average threshold. Panic sets in the investors, crashing up the sentiments.
- Strategical investors set into the frame in this phase. Simultaneously, taking up volume of trade, and prices of stocks.
- This phase is the conversion of bear into bull market. Drop in prices continue, but in a slow pace. This turns the investment favorable, where the stock prices are low, filled with good news. Likewise increasing the demand.
Example of Bearish Market
Bear Market Example, on a real world basis are as follows:
- Housing mortgage default happened in the year 2007, led to the crashing of stock market in the month of October. It was a time when the index was as high as 1565.15, but with time being, it took a steep to 682.55 on March 2009. This was as the defaults recorded in the economy.
- Another example is of the great depression, which happened in the year 1929. It was when S&P loss as much as 49% of its value. It was considered to be the worst of all bear trend in the history.
Bear Market – Conclusion
We assuredly would like to assume everyone wishes to know the immersion of the name Bear Market, just like we do. The name is however, right in context with a bear, where it hunts its prey, swinging its claw in a downwards fashion, indicating a downward movement of stock prices.
Now that you have the idea of bearish market and its happening, it would be easier for you to invest in stock market, being a beginner. With the appropriate knowledge, you would have a chance to plan in advance, and build strategies.
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