Many people have heard the term “bear market” but don’t really know what it means. A bear market is simply a prolonged period of time when stock prices in the stock market are falling. There is no set definition for a bear market. However, most investors widely refer to a decline of 20% or more from the S&P 500’s recent highs that meet the criteria.
Why Do They Call It A Bear Market?
The terms bulls and bears are used to describe two different types of market conditions. A bull market is one where prices are rising and investor confidence is high. A bear market, on the other hand, is one where prices are falling and investor confidence is low.
The origins of these terms are unclear, but there are a few theories. One theory is that they come from the way bulls and bears attack their prey. In detail, bulls tend to charge straight ahead, while bears swipe at their prey from the side. This analogy is often used to describe how different investors approach the stock market. This means bulls tend to be more aggressive. They usually buy stocks even when prices are rising. Meanwhile, bears are more cautious, selling when prices start to fall.
How Do Bear Markets Happen?
There are many reasons why stock prices might fall sharply enough to trigger a bear market. Concerns about an impending recession or rising inflation are two of the most common catalysts. Additionally, whole sectors of the economy may fall out of favor with investors (think energy stocks in late 2014). Whatever the reason, when enough investors get spooked and start selling. As a result, it can turn a small market correction into a full-blown bear market very quickly.
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What Happens During A Bear Market?
During a bear market, it’s not uncommon for stocks to experience sharp swings – both up and down – from day to day (or even hour to hour). This increased volatility can make it difficult (and dangerous) for investors to time their trades correctly. As such, many individuals choose to sit on the sidelines until the dust settles and valuations become more attractive.
Another common occurrence during bear markets is that some investors may be forced to sell their holdings due to margin calls. When an investor buys shares on margin (meaning they borrowed money from their broker), their brokerage firm has the right to demand that additional funds be deposited if the value of their account falls below a certain level. This is done to protect both the investor and the brokerage from losses in case the stock price continues to fall.
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Bottom Line
Bear markets can be scary times for investors but it’s important to remember that they are a natural part of the economic cycle. Prices will eventually rebound and those who are patient may be handsomely rewarded for their patience. With that said, it’s always important to consult with a financial professional before making any major investment decisions.
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