What is Bear Market?
Definition of Bear Market
An Annual Bear Market refers to a condition in the financial market where the prices of securities (like stocks) are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures vary, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market. An Annual Bear Market suggests this condition persisting generally for about a year.
3 things to know about Bear Markets
- Bear markets typically occur when the economy is in or heading into a recession. They are usually accompanied by an economic downturn, high unemployment rates and falling investor confidence.
- Not all bear markets are the same. Some can be short-lived, lasting just a few months, while others can persist for years. The duration and severity of a bear market often depend on the underlying reasons for the market decline.
- Bear markets can actually provide investment opportunities. This is because securities are often sold at a lower price than their true value due to widespread pessimism, allowing astute investors to acquire them at a discount. However, this strategy requires thorough research and a high risk tolerance.
Why Bear and not something else?
The term "bear market" is believed to have originated from the way a bear attacks its prey - swiping its paws downward. This action is metaphorically linked to the movement of the market during a bear phase where prices are falling. This contrasts with a "bull market," where prices are rising, derived from the way a bull attacks by thrusting its horns up into the air. While there's no definitive origin story for these terms, they've been in regular use since the 18th century.
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