What is a bear market?
A bear market is when the prices of stocks have fallen. Typically the bear market is defined as 20% or more from current highs. The bear market term is mostly used to refer to the S&P 500's performance. But it can also be used for an individual stock or index which have fallen 20% or more from recent highs. Bera market is typically characterised by recession, losing share prices, fewer jobs, and a lousy economy.
The terms bulls and bears are derived from the way of attacking these animals. A bull attacks someone by keeping his horns upward in the air, and the bear is just the opposite of the bull. A bear attacks someone by pushing his paws downward.
A very famous example of a bear market is the dot com crash of 2000 and the COVID 19 crash of 2020.
Advantages of Bear Market
Every crisis has both pros and cons. Over the years, the bear market is considered a symbol of loss. But there are numerous benefits of a bear market. Here we are going to tell you the benefits of a bear market.
1. Enables Profit Making
When an investor or trader sees a new opportunity which is likely that prices of the underlying assets will go down, this type of scenario promotes profit-making and capitalisation on these opportunities. For example, an inverter or a hedge fund manager identifies that there will be a dip in the value, and he sells all the shares or stocks before this condition. Thi bearish view helps the investors to gain at the time of the catastrophic collapse.
2. Mirror Market Sentiments
The stock market works as an economic barometer of any country which tells what the financial condition of the nation is. A bearish trend triggers the selling of great extent stocks. This would ultimately cause a considerable fall in the stock market. This fall is nothing but a mirror image or market sentiments of the economic events happening in the country, which in turn mirrored in the stock market downfall.
3. Allows to Buy Cheap
One more benefit of a bearish market is that an investor can look forward to buying at a relatively lower price in a specific downfall in the market. Investors can make a good profit by selling off the stock when the prices will go up in the future.
4. Encourage Short Trades
If an investor has an opinion that the value of a particular security will decrease. In that case, he/she may go for a short position or else if he/she feels that the security will go down, then they may buy a put option. That is why the bearish view supports and encourages short trades.
5. Promote the Efficiency in Market & Dollar-Cost Averaging
By authorising the investors to go short on particular security, index or instrument in the stock market enables efficiency in the market as the countless short trades push down the stock price that may intersect with its intrinsic value if it is deemed to go down.
A trader who has a bearish view may start SIPs (Systematic Investment Plans) into mutual funds even after knowing that the stock market modifications will enable the average cost of the dollar to be invested and consequently will not fear from the bear market.
Disadvantages of Bear Market
After learning about the advantages of the bear market now, it's time to understand what are some disadvantages of a bear market.
1. Economic Decline
At times, the stock market derailment may affect a significant economic decline because of this situation; the jobs may be lost, wide recessions. Businesses may be shut down, and this may also continue to have unwelcome consequences or shock waves on other economies. In a worst-case scenario, it can cause a global meltdown.
2. Market Crashes
Sometimes, due to any one-off situation or panic situation of some combined investors who have a bearish view, a massive decline is triggered. This looks terrible to foreign portfolio investors and foreign institutional investors; hence they start withdrawing their money from such a country that is going under such phenomenon.
3. Make Room for Speculation
The investors who have bearish views are inclined to hypothesise a lot on the stock market along with a strong faith that it will go down in value for sure. Although, this hypothesised behaviour will lead to a condition of invalid bets and considerable losses to the investors if the markets keep increasing every time instead of moving in bearish favour. Thus, this type of behaviour can cause losses on a wide scale if the bets go down.
Bottom Line
Bearish markets can cause businesses to slow down/shut down, markets to go down, economic collapse, and even jobs lost. For some investors, the bearish market is the best opportunity to buy stock to make a good profit. And for some investors, if their speculations turn upside down, then it could cause a great deal of destruction.
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