Stock Market: Bear Market Explained

What is a bear market?

Bear market is a term used to describe downward movement in stock prices over an extended period. In another word, when there is a downward trend in stock prices, it will be said that the market is bearish. Bearish market can last for months or years depending on the prevailing circumstances. Baer market can happen within one or more specific sectors. It can even cut across the entire stock market.  Please note that bear market is not restricted to stock market only. The term is used in financial markets generally and it means the same thing. This means that the term can equally be used in real estate, gold, commodities and foreign exchange markets. But in this article, we are focusing on stock market.

Bull Vs Bear Market

The same way there is bear market, there is bull market too. What is a bull market? Bull market is simply the opposite of bear market. It is a period of sustained rise in the stock prices over a prolonged period. Bull market is a reflection of investors’ confidence in the stock market. During bull market, there will be more people coming into the market to invest.

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Apart from the general fall in the prices of stocks that are listed in the stock exchange, there are other things you can watch out for in a bear market. Among other factors, there is one thing that is common to all bearish markets. I can describe it as the main force that usually drives down stock prices. It is the force of demand and supply. In any perfect market, price of an item will fall any time the demand is less than supply. When you have more people willing to sell an item than people who are ready to buy, there is likelihood that sellers will reduce the price of the item. In the same way, buyers will not be willing to pay more. If one seller is not ready to sell at a particular price, other sellers may be much ready to sell at that or cheaper price. As long as there are more people who are willing to sell, price will tend to decrease.

On the contrary, during bull market, we usually have more people who are willing to buy. This normally drives up the stock prices. So, let look at those factors that affect the demands for stocks which can lead to bear market.

Increase in Unemployment Rate: Any time there is a rise in the level of unemployment rate; this means that we have many people who are not earning income. The less income-earning individuals we have, the more the number of people who will depend on the income of the employed people. We know that, if one is not generating income, he may not have money for investment purpose. With more people that are out of employment, the less people who will be able to invest. On the other hand, if there is increase in employment rate, there will be more income in the economy. Whether they invest by buying stocks directly from the stocks or they invest in pension fund or mutual funds, most of the money may find their ways back to the stock market. Pension companies and mutual funds are institutional investors. Their activities in the stock market can fuel the rise in stock prices thereby making the market to be bullish,

Economic Recession: During economic recession, stock market is one of the sectors of the economy that is mostly affected. The markets become bearish. In such a period, people have less disposable income. With less disposable income, this means that people will have little or no money left after that have taken care of their basic needs. In fact, many investors may likely sell off their investment in order to earn some income or in an attempt to cut short their losses. When you have many people selling their stocks, this action will drive the stock prices. On the other hand, in the time of economic boom or recovery, people will suddenly remember the need to plan for the future. Even if you don’t think about investment, you tend to hear more jingles about investment products which can make you decide to invest, Of course, financial planners and stock brokers are always out to seek for clients/investors when the economy is good.

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Poor Company’s Performance: There may be a general fall in the performance of a particular sector of the economy. The poor performance may be due to harsh business environment or unfavourable change in government policy. When the results being released to the market are poor, there is likelihood that such companies may not be able to declare dividends. One of the reasons some people invest in stocks is for them to be able to earn dividend income. If they envisage that such dividends will not be forthcoming, you will see many of them selling off their stocks to augment their income.

Should you buy stocks in a bear market?

Buying stocks during bear market can result to loss. It is not always advisable to buy stocks when the stock prices are trending downward. Some people make the mistake of buying stocks during bear market thinking that they are buying stocks at the lowest price. The problem is that, no one can really tell when the price has reached the bottom. If you want to take advantage of bear market, it is better to wait till the time the prices have started to rise again. Although you may miss the opportunity to buy your stocks at the lowest prices, you will be able to avoid the temptation of buying when the price is yet to bottom out. You should understand that no one can make the whole gains in the stock market. You should be willing to leave some gains for other investors to enjoy. For your information, greed is one of the reasons some people will not be able to make money in the stock market. If you want to make all the gains, you may end up losing all your gains back to the market.

However, let’s look at the likelihood of what that can happen if you buy stocks in a bearish market. One, you can buy and be fortunate to buy when the price of the stock has actually bottom out. This will be just a game of chance and you cannot accurately be sure that the price will not go down further. But if it happens that you get it right, you stand the chance of recording high gain by the time the price starts to rise. Another thing that can happen is for the price to go down further. This may be a bad news for speculators and this will result to a loss in the interim. Also, no one knows how deep the price may go down further neither do anyone tells when the trend will correct itself. For individuals that like to invest long term, this may not constitute much concern. On the other hand, if you totally want to play safe, you might decide to play neutral by doing nothing. That means you are not ready to take any risk. Then, you should not expect any gain either. No gain no loss.

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Should you sell off your stocks in a bear market?

The decision whether to sell your stocks will be personal. Your investment goals will guide you. Some people sell off their stocks to quickly cut short their losses. While other investors who have long term perspective may decide to hold their stocks hoping that the market will correct itself. But if you sell your stocks in a bear market, this might mean three things: (i) You may be selling your stocks at a loss; (ii) You are making no gains nor loss, meaning that you are selling the stocks at a price at which you bought the stocks; or (iii) You are selling at reduced gains. Whether you will make gain or loss from the transaction will largely depend on the price at which you bought the stock. If you choose to sell off your stock in a bear market, you may avoid further erosion in the value of your stocks. On the other hand, you may sell today and the stock trend reverses itself in a short while. This means that you may end up buying the same stocks at a higher price in the future.

The conclusion is that, stock market is so dynamic. No one can actually know exactly when bull or bear market will take opposite direction. That is the risk involved in stock investing. 

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