Debt Dictionary

Bear Market

Investment Dictionary -> Bear Market

Bear markets refer to market developments that denote a continuous decline in the price of securities. The investors expect losses and the pessimistic attitudes thrive. In should be noted that Bear markets differ from corrections which last no longer than two months. In contrast to corrections, the bear markets do not usually offer good entry points. Moreover, it is difficult to predict when the bottom will be reached.

The bear market appears when the state of the economy starts to decline. There is a considerable drop in most of the stock prices. This substantial decline is typically due to decreases in the profits of corporations. Alternatively, the bear market starts after corrections of over-evaluation. This happens when the value of stocks had been too high and now decreases to more acceptable levels. Scared investors will sell their securities and cause a further drop in the price level. This herd behavior becomes worrisome for other investors who also decide to sell their stock. The whole process turns into a vicious cycle.

In general, the value of the securities may drop suddenly or over an extended period of time. The final result will be the same: the quoted value of securities declines. Two major conclusions may be drawn with regard to bear markets. Firstly, the bear market affects adversely only those investors who plan to sell their stock at the very moment. Secondly, long-term investors profit from the overall decline in prices which accompanies the bear market. The average investors should look for large and solid corporations which are expected to grow during the next twenty years. Even if their stock prices fell considerably, these companies are more than likely to survive the drop in values. Therefore, it is important to differentiate between the current value of the stock and the business itself.

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