What is a bear market in stocks?

Many people have heard the term “bear market” but I don’t really know what that means. A bear market is simply an extended period of falling stock prices. There is no set definition for a bear market. However, most investors are broadly referring to a decline of 20% or more from recent S&P 500 highs that meet the criteria.

Why do they call it a bear market?

The terms bullish and bearish are used to describe two different types of market conditions. A bull market is a market where prices are rising and investor confidence is high. A bear market, on the other hand, is a market 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 strike their prey from the side. This analogy is often used to describe how different investors approach the stock market. This means that bulls tend to be more aggressive. They usually buy stocks even when prices are rising. Meanwhile, bears are more cautious and sell when prices begin to decline.

How do bear markets work?

There are many reasons why stock prices could fall enough to trigger a bear market. Worries about an impending recession or rising inflation are two of the most common catalysts. Additionally, entire sectors of the economy could fall out of favor with investors (think energy stocks in late 2014). Whatever the reason, when enough investors get scared off and start selling. As a result, it can turn a small market correction into a full-fledged bear market very quickly.

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What happens during a bear market?

In a bear market, it’s not uncommon for stocks to see big swings – 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. So many people are choosing to stay 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 stocks on margin (i.e. they have borrowed money from their broker), their brokerage firm has the right to require additional funds to be deposited if the value of his 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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Bear markets can be a scary time 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 could be handsomely rewarded for their patience. That said, it’s always important to consult a financial professional before making any major investment decisions.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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