What is a bear market?
The term bear market refers to the phase where financial markets experience a sharp and prolonged decline in prices, often defined as a drop in asset value of 20% or more from its peak, and this trend lasts for a relatively long period.
Why is it called 'Bear Market'?
The term 'bear' is used because the bear, when attacking its prey, uses its claws to strike from above, which signifies the downward movement of the market. Conversely, the upward market is called 'Bull Market', named after the bull that attacks by thrusting its horns upward.
Bear Market Characteristics:
• General pessimism among investors.
• An increase in selling activities out of fear of further losses.
• A slowdown in economic activity and a decrease in profits.
• Declining confidence among investors and companies.
Real-world examples:
The world has witnessed several bear markets, such as:
• The 2008 financial crisis, which led to massive collapses in global stock markets.
• The crypto market in 2022, where the prices of most cryptocurrencies fell by more than 70% from their peaks.
How does an investor deal with a bear market?
In such circumstances, investors tend to:
• Hedging with safe assets like gold or the dollar.
• Reducing risk, or temporarily halting purchases.
• Capitalizing on opportunities by buying during the downturn, if they have a long-term vision.
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