Bear Market | Definition

Bear markets do not last for very long, but it is important to be aware of them and make investments to hedge yourself against the risk of your investments lowering in value.

A bear market is a period of time when the value of securities or assets is generally dropping in value. It is also characterized by a generally pessimistic feeling about the overall economy and financial markets. The opposite is a bull market.

The stock market fluctuates daily, and it is usually apparent when a bear market comes. The attitude toward investing changes, and investors get nervous, leading to price drops.

While you can’t say, it is a bear market until after it has happened, investors on the ground can usually know it is happening by the general change in attitude. Why does the value of assets drop anyway? To understand why a bear market would even happen, we need to understand the general stock market.

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How the Stock Market Works

The stock market is an exchange of financial securities. A security certificate is securing that you own something. Stocks are equity in a company or debts owed by a company. People buy and sell stocks and bonds daily.

For example, the more people try to buy a particular stock, the higher it is valued. As more people try to sell that stock, its value decreases. The basic principles of supply and demand govern stock prices and values just like anything else.

When the majority of people are fearful and stop buying stocks, values drop in general. This overall drop in values is called a bear market.

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What Causes a Bear Market?

So if people selling securities causes a bear market, why are they selling? There is no firm answer to this, but investors tend to sell riskier securities when there is an economic downturn, high unemployment, or low confidence in the future economy. Typically, people shift to fixed-income securities such as bonds during this time. Bonds are typically safer as they provide a guaranteed return on investment. Therefore, as people sell securities, they lose value, and suddenly you have a bear market.

Historic Bear Markets

It is hard to pin down bear markets until long after the fact. The most infamous bear market was the stock market crash leading to the Great Depression. The bear market lasted from 1929 to 1932. A more recent historic bear market was The Great Recession in 2008. This economic downturn was 17 months long, also seen as an inordinately long time. Bear markets are usually shorter than a year.

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Bear Market Cautions

It can be really easy to fall prey to the terror of a bear market, so here are a few things to keep in mind.

• Historically, no bear market has lasted forever. That means that if the previous pattern holds, it makes more sense to hold your securities through a downturn because they will bounce back in the long term.
• It is nearly impossible to “time the market” so trying to buy at the bottom and sell at the top usually doesn’t work. Do not look for short-term gains but rather more sustainable long-term investments. 
• You can continually buy securities without worrying about a bull or a bear market using a strategy called dollar cost averaging.

Disclaimer: The above information should not be considered financial advice. Consult with a financial advisor before making any decisions.  

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