In investment terms, a bear market is any investment period with falling stock prices. Investor confidence is usually very low during such a time, with some investors even panicking to sell their stocks before prices get too low. The financial implications of a bear market can vary depending on the overall strength of the stock market at a given time, but most bear markets are marked by a 20 percent or higher downturn in stock prices over a two-month timeframe.
Bear markets usually begin after a period of higher stock prices. These prices might level off and start to drop, which causes investors to lose their confidence in the market and sell off the stocks they believe will continue to drop in price. This in turn causes prices to drop even further, which causes trading activity to slow down. Eventually, the lower stock prices that come with a bear market will encourage investors to invest in certain stocks that look like they represent a lower financial risk. This can cause prices to begin to increase and turn the bear market into a bull market.
Origins of the Term “Bear Market”
The term “bear market” refers to the way in which bears tend to attack. They usually attack their prey by swiping their paws in a downward motion. An attacking bear’s paw moves downward, and so do stock prices during a bear market. By contrast, bull markets are named for the aggressive, head-on way in which a bull attacks something. Stock prices go up during a bull market, so investors are encouraged to be aggressive in their investments.
Bear Markets vs. Market Correction Periods
Bear markets are often confused with market correction periods by novice investors. While the two do appear to be similar, they are not the same thing. A market correction period is when stock prices drop after a period of being higher than they should have been. It’s essentially the market correcting itself after experiencing an anomaly. On the other hand, prices will continue to plummet during a bear market, even if they’ve been strong in the recent past.
Investment During a Bear Market
As a rule, investing in new stocks during a bear market is a bad idea. Prices are dropping quickly, and any investment you make will likely turn into a loss. Wait until prices start to stabilize before making your move. That way, you have a low-risk investment that could pay off in the future.