When there is a bear market, this is another way to say stocks have gone down. This seems like a serious situation, right? After all, it affects entrepreneurs, investors, and customers while lasting for some time.
So what is it exactly, and why is it important to know about this particular term?
Not only will we answer those in this article, but we’ll also provide some of the most asked questions about it and our compact take for your easy understanding.
What Is a Bear Market?
A bear market is a circumstance when the price of stocks on the market falls steadily over time by at least 20% from recent peaks. For instance, a company experiences a 30% decline in the value of its stock after publishing weak earnings. That stock has entered a bear market.
Along with the bear market, there are other terms you might encounter when reading news coverage about the market situation.
This is a situation when a stock value declines by 10 to 20% from its latest high. It can last from a few days to months and happen to rectify falsely inflated stock prices. Most market corrections in the past frequently led to a return to normalcy or even a bull market.
This is the market condition when the stock market’s value drops significantly by at least 10% in one day to a few. For instance, a market crash might hinder regional economic progress, resulting in the government cutting spending. The most prominent example of this happened after the emergence of the COVID-19 pandemic in 2020.
This is a period of solid expansion when the stock market price consistently increases. Lasting for months or years, the bull market and bear market are two trends representing the investments’ securities. The former sees the prices of significant securities increase, contrary to the opposite for the latter.
Why Is It Called a Bear Market, and Why Is It Important to Know?
Of all animals to be associated with the term, why a bear? While the origin is unknown, some analysts think it comes from how this particular animal fights. A bear swipes their claws downward when attacking, symbolising a decline. Similarly, the bull attacks with its horns pushed upward, indicating an increase—earning the name “bull market”.
As an entrepreneur, knowing how the market currently sits is helpful to navigate the success of building your startup. Indeed, you can’t control the market. However, it’s possible to take advantage of its opportunities and learn how to cope with its problems.
A bear market signals the status quo isn’t working, and something must change right now. Flexibility is essential in this situation. Entrepreneurs who aren’t afraid of change will strive to create innovation. Rather than seeing a bear market as a missed opportunity, they adapt efficiently.
For instance, generating customers is still possible even though they become hesitant when purchasing your products. Identify obstacles presented in bear markets like this, and find ways to solve them. Convince them that there are few risks if they move forward with you. It’s all about maintaining customer relationships and being persuasive, which we cover extensively in our article “How to Employ Persuasion Techniques for Entrepreneurs.”
Commonly Asked Questions About Bear Market
This investing term isn’t exactly new, but there’s still a lot of confusion surrounding it. We’ve compiled several common questions about it below, along with our compact answers.
How Long Does a Bear Market Last?
There’s no concrete answer to this, but most investors will say it takes up to a year. Sometimes as much as two years still qualifies.
We’ve entered 26 bear markets since 1928. In less than a year, 8 of 15 bear markets reached parity. However, the most prolonged was in 1973-1974, which lasted almost 21 months. Though, experts say that up to 10 months is the average length.
How Does a Bear Market End?
During bear markets, investors will back down due to pessimism and lack of confidence. They tend to keep selling, which drives prices further down.
With this in mind, it’s easy to know when this market pattern ends. It’s the moment when prices drop so low that the investors get optimistic and start purchasing stocks again. In anticipation of future gains, stock prices will rise as more investors buy in.
How Long Does It Take to Recover?
However long it lasts, a bear market is normal and always comes to an end. Recovering from it still takes time, though, and it’ll depend on how the upcoming years look like.
Some experts said up to 3 years to get the stocks to rebound sounds plausible. However, the previous three bear markets in 2011, 2018, and 2020 saw equities recover losses in four to five months.
The bottom line: recovery is slower when a bear market is at its worst. Many factors influence the numbers as well. For instance, inflation and political conflict might affect the current market situation.
Will There Be a Recession?
It’s normal to worry about whether a recession naturally follows a bear market or not. Fortunately, this isn’t always the case. Since post-World War II, six bear markets didn’t precede recessions.
A recession can appear on the horizon if there’s a bear market, though. Again, it depends on current world events and situations. When consumer spending is strong, a recession is unlikely to occur. On the other hand, it can be unavoidable when inflation keeps increasing.
Should I Invest in a Bear Market?
Bear markets sound like a nightmare, so does this question even make sense? It turns out that doing this can be good.
When a bear market hits, even high-quality stocks also follow the decline. This gives buyers fantastic opportunities to purchase those at a reduced price.
There’s also something called “selling short”. That is, taking out a loan on stock, selling it when it’s expensive, and re-purchasing it once the price drops.
Be mindful of the risks in whatever way you use to buy during bear markets. Be strategic and alert all the time.
A bear market is one investing term that defines the declining stock price situation in the market. Usually, it’s marked by at least 20% from recent highs. Don’t get confused over the other terms, such as market correction, market crash, and bull market!
As an entrepreneur, knowing more about the market is beneficial in navigating the success of your start-up. Investors and customers will back down and be afraid to put their money out. However, if you successfully identify the obstacles and understand their struggles, it’s possible for your startup to still thrive during this time of stock decline.
This market situation typically lasts up to 10 months—many times even shorter. It ends when buying is active again, shown by investors’ optimism. Recovering from a bear market depends on how worse it was. It doesn’t always lead to a recession, and when done carefully, purchasing during bear markets can be a good thing.