The term bear market refers to a phase in which financial markets experience a sharp and prolonged decline in prices, often defined as a drop in asset values of 20% or more from their peak levels, and this trend lasts for a relatively long period.
Why is it called a 'Bear Market'?
The term 'bear' is used because when a bear attacks its prey, it uses its claws to strike from top to bottom, which indicates a downward market movement. Conversely, a rising market is called a 'Bull Market', named after the bull that attacks by thrusting its horns upward.
Characteristics of a bear market:
• General pessimism among investors.
• An increase in selling due to fears of further losses.
• A slowdown in economic activity and a decline in profits.
• A decline in investor and corporate confidence.
Real-life 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 digital currencies dropped by over 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 risks, or temporarily stopping purchases.
• Taking advantage of opportunities by buying on the dip, if they have a long-term vision.
