BEAR MARKET DEFINITION:
A bear market is that state of the stock market in which almost all the scrips prices fall at least 20% from their recent highs. It is the phase when pessimism is the dominant emotion of market. During this term, not only the stocks but the indices also witness a drastic fall in very short span of time. The U.S. and Indian stock indices fell into a bear market in the second half of 2018, witnessing a fall of around 25%. Being an integral part of working of stock market, it presents a good opportunity in front of the investors to garnish good returns by picking the good quality stocks available at a cheaper valuation, generating more than usual returns.
TYPES OF BEAR MARKET:
- SECULAR BEAR MARKET:
Bear market do not have a specific term, they can stay for multiple years or just several weeks. A secular bear market has scope of its effect ranging from 10 to 20 years, characterised by below average returns on a regular basis. In the meantime market produces some rallies but the price reverts back to lower levels.
- CYCLICAL BEAR MARKET:
Cyclical bear market lasts for smaller span of time. During this tenure the market becomes range bound, i.e. moves within an upper and lower range. A secular market can contain several cyclical markets.
FIGHT BETWEEN BEAR AND BULL:
Bear market is the exact opposite of bull market. Bears are considered to drag down the market and bulls to uplift the market, similar to their respective attacking natures. As bear attacks by swiping its paws downwards and bulls attack by thrusting their horns in air. When downfall is the dominant movement of overall market, bears are considered to be overpowered. A consistent fight keeps on going between bear and bull in the form of selling and buying respectively. The one which is in majority stays the ruler.
CAUSES OF BEAR MARKET:
The main reasons behind a bear market are:
- SOMETHING IMPORTANT HAPPENING IN THE COUNTRY:
This can lead to both, either a bear market or a bull market. Consider the example of general elections happening in the country, due to this the movement of market will be heavily affected. Market thrives for stability and big investors respect market’s sentiments. Eventually they will stop buying and start booking their profits. This will overpower the bear and the market will fall. But, this also can be taken as a reason for bull market. WHY? Because if the investors get an early symbol of a more stable government being formed, they will start buying in bulk and thus the bull will be overpowered. Similarly, a terror attack on the country can have adverse affects.
- SLOW ECONOMIC GROWTH:
The economic growth of a nation does play a pivotal role in the movement of its stock market. A country growing at a faster rate will produce more jobs which will increase per person income implying more savings, which will reach somehow to the stock market, either directly or indirectly, when the individuals will look for a good source of investment. And if the economic growth is slow, these things will not happen thus overpowering the bear.
The healthy economic growth will also help the businesses in performing well continuously. As a consequence, their results will improve. The improved results will grab some eyeballs and lead to buying of respective stocks. When buying will happen the stock market will get good support and hence witness a rally. But, if the economy is slow the results will not show any major improvement. So no one will be interested in buying the stocks and the market might not perform well.
- BAD GLOBAL SCENARIO:
The weigh age of every company’s stock in the index is different. Market capitalisation of a company plays a decisive role in deciding their respective weigh age. All the companies which have a good weigh age in the index are the blue chip companies. These companies run their business in many parts of the world. For example consider Tata motors, an Indian auto company. It is active in more than 50 major countries. Now, consider if the price of crude oil goes up, the transportation cost of this company will increase. Putting a pressure on margins of the company. And as the weigh age of its stocks is high, the index will also be under pressure. And many more such cases can lead to a bear market, but these being the major ones.
CORRECTION AND BEAR MARKET:
Corrections should not be confused with a bear market. Correction is a short term downward trend in the market, which is very healthy and beneficial for the investors. It is the curtsy of corrections which provide good quality stocks at a very reasonable price. They are helpful in providing good entry points to the investors, as the bottom of a correction can be somehow predicted. But, finding a good entry point during bear markets is not really possible. As no one really can predict the end of a bear market. Trying to cover losses in a bear market can be a piper’s dream, unless investors are short sellers or use some innovative techniques.
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