A Bear Market refers to a period of months or years during which prices of some listed securities are consistently falling. The condition of bear market is just opposite of bull market , in which prices of securities rise on consistent basis.The terms bull and bear are used to describe the present behavior of stock market, i.e whether the value of stocks are appreciating or depreciating.In bear market there is lack of confidence in the market, often people wait here for bulls to drive the prices up again.
How a bear market works is discussed below :
To identify this having a good knowledge of current market conditions is must. Often when market is bearish at least 80% of all stocks price start falling or major decline in the indexes can be witnessed. There are several factors which causes such movements in the market like economic cycles, individual sentiments of traders and investors . A weakening economy as indicated by low employment ratio, decrease in profits of business, low trade volumes of well-known companies might show that market is bearish.Using price charts also it can be identified market is bearish or bullish. Lower tops and lower bottoms in price movements of many different stocks and sectors indicates a bear market.
Another factor that is investors sentiments also signals a bear market. On some beliefs and market knowledge investors believes that market is going to be bearish and based on their assumptions they start taking necessary steps like selling of shares to avoid earning huge loss. The entire selling of stocks under such market conditions can be done by taking short position in the market. After placing your order those shares will be removed from your demat accountand loss/profit will be booked successfully. As number of investors taking such action increases expectations turns in to reality. This factor of investors sentiments is not quantifiable and can not be measured .
Though there are no precise beginning and end bear market has four phases :
- 1st phase: Both price and investors sentiments are high, investors tends to book profit and exit from the market.
- 2nd phase : There is sudden decrease in prices of stocks and corporate profits which results in less trade volumes.
- 3rd phase: Speculators enters in the market resulting in higher trade volumes.
- 4th phase : Price of stocks continues to fall but this time at slow rate by eventually giving way to bull market.
This is what meant by bear market and how traders can identify it. Technical analysts helps in determining what factors are likely to cause next bear in the market and how long it will last. Bear market cost traders money as there is sudden fall in stocks prices but they do not last forever , and they do not always gives a prior notice before arrival.
