What is a Bear Market and how to recognize it?

 

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Bear market can be defined as a situation where there is a trend of falling of stock prices for an extended period of time. When the price of an investment falls at least 20% from it's high, a bear marker is declared. Bear markets are scary, there's is no doubt, but it is proven that the stock market will bounce back, and if one has a positive perspective about the bear market and he is focused on potential gains rather than losses, bear markets have great opportunities to pick up stocks at lower prices.

Causes of a Bear Market.

1. Recession in the world- Many a times certain companies tend to under perform, which leads to reduced market demand for their products, and the share prices for these companies start loosing their value on stock exchanges. Such stock market fluctuations affect the small and mid-capital businesses and also have an effect on large companies.

2. Unexpected fluctuations- Different socio-economic factors and political factors impact the performance of major companies in an economy, due to which there is an impact on the investments, hence leading to a negative effect on the prices of stocks.

3. Fluctuation in an economy- A domestic economy is bound to get affected when there is any fluctuation in a sizeable major economy. As in today's world countries are highly interdependent on each other for various commodities and services, certain situations like tensions between two countries, will surely effect directly or indirectly the export and import revenues of the domestic economy as well.

How to recognize a Bear Market?

1. Recession- Individuals create a negative image regarding investments when there is a bear market. During the recession times the demand for services and commodities decline, and higher supply cause the price level to decline sharply, leading to the consequences of a bear market. Negative growth rates of a country, adverse impacts on the stock market prices, and also high unemployment rates, can be seen as a severe case of recession.

2. Stock Market Indices- There is an occurrence of the bear market when there is a downtrend in major benchmark operating in the country. A bear market is declared when there is a fall of more than 20% in the index values prevailing for at least 2 months or 60 days or more. During this period investors prefer holding their money or invest in instruments having less risk rather than invest in stock market. The external factors or the uncertainty prevailing in the economy is responsible for such stock market variations, which might have a short term impact.

Types of Bear Market. 

1. Cyclical- There is a scenario which shows that markets adjust after a long period of boom in the economy, usually every 6-10 years. Therefore, cyclical bear stocks arises due to business cycle fluctuations in an economy. In a cyclical downtrend falling prices adjust automatically in a couple of months and investors regain that positive outlook regarding investments in the stock market.

2. Secular- Investors are encouraged to undertake interest in zero risk instruments which have high interest like treasury bills and bonds, which reduce the total speculative demand for stock market instruments, generating an outlook of bearish stock market. Therefore, long term economic conditions, occurring due to domestic policies leads to secular bear markets.

A Bear Market can trigger unemployment and tougher economic times, as the investors see a downfall in the performance of the economy, so they sell the stocks, pushing the economy lower, as they expect corporate profits to decline in the near future.

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