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About Bear Markets

Stock markets are crucial for gauging the rise and fall of any economy. When a company issues an Initial Public Offering, it is all but offering a part of its company to investors in order to raise funds for expansion. They need to be listed on the stock exchange for facilitating this exchange, and the person that connects the company with their esteemed customers is called a stockbroker.

The best stock brokers have a clear idea of the most profitable companies and advise investors about the most promising companies which will double their investments.By investing in themselves, businesses can grow exponentially. Issuing stock is the most prudent and effective method to raise capital. This leads to great profits for the company when the stock market reaches a high point. However, conditions such as bear markets lead to adverse effects for any company and their investors.

Definition of bear markets-

  • The reduction of prices of an investment over a period of time is the primary reason behind the development of a bear market.
  • It is an unfavorable condition where the prices of securities fall and this downward spiral is propagated extensively by widespread pessimism regarding the prices. The investors lose confidence which forces them to pull out investments and this promotes the selling of shares.
  • There is usually a variation in figures, but it is seen that a fall below 20 percent from a peak in multiple broad market indices such as Dow Jones Industrial Average or Standard and Poor’s 500 Index (S&P500) considered over a span of 2 months leads to falling in a bear market.

A deeper insight into bear markets-

  • Origin of name- The opposite of a bull market is a bear market. The name is derived from the way the bear catches its prey- by swiping its paws downwards. The fall of stock markets is compared with this attacking technique.
  • The most tragic part of bear markets is the sluggish and slowing economy that already exists along with it. This slow economy is characterized by low employment, low disposable income, and dropping business profits. Government interventions can also create a bear market by making changes in tax rates or federal fund rates. But most of the times, the drop in investor confidence due to the onslaught of an event leads to a bear market showdown.
  • Bear markets are typically confused with corrections which have a duration of fewer than two months. Corrections may be beneficial for some new value investors to find entry points into stock markets, but bear markets can leave all investors bare. Pun intended.
  • The outcome of a bear market or its depth is uncertain. Investors can fight a losing battle in an attempt to recoup losses unless they find a way to sell shares and make gains even in falling markets. A survey has discovered 32 bear markets between 1900 and 2015, averaging one every 3.5 years. The most recent bear market was concurrent with the global financial crisis that occurred between 2007-2009 when DJIA registered a 54 percent drop. Thus, it has been established that a bear market is detrimental to the growth of companies.