What is Considered a Bear Market?

by Investing School on May 11, 2011

As the opposing sibling term to a bull market, the bear market indicates a downward turn of the economic indicators both in the financial world and in general. While the term can be applied to any sellable commodity, it is most commonly applied to stock market fluctuations. The prices of securities fall during this market trend and pessimism related to the overall financial situation often results in a self fulfilling prophesy where conditions fail to improve.

Investors expect to lose money during a bear market, and as more securities are sold off, the cycle continues its downward trend. A rule of thumb financiers apply is that if there is a downturn of 20% or more in a number of broad market indexes during a period of two months or more then a bear market is “declared.” Other signs of a bear market are an increase in unemployment an economic recession or a rapid rise in inflation.

A bear market is not the same thing as a correction, which is considered a short term trend. Corrections can help a new investor plan when to enter the market, whereas a bear market provides no such advantage. A correction period is followed by a period in which stock prices rise once again.

Purchasing new stocks during a bear market is a questionable proposition. It is challenging for an investor to make any significant profits unless they pursue investing as a short seller.

The most well known bear market was the Great Depression of the 1930s, it took World War II to bring that particular bear market to an end.

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