Bear Markets – Understanding the Term

Beginning investors will undoubtedly come across plenty of terms with which they are not familiar. A “bear market” is probably one of them. Bear markets exist when the market condition sees falling securities prices, investment pessimism, and subsequent losses. While there isn’t a precise number to measure or define such a market, taking a 20% downturn in market indexes like the Dow Jones Industrial Average is said to be the beginning of a bear market. Unlike a correction, this is not a short-term trend that will readjust itself in a couple of months, and entry points are at levels from which most investors would shy away.

On the opposite end of the spectrum is the bull market, which is a term to indicate when stock prices have gone up for a long period of time. This is also indicative of a certain company, sector, or industry going up. Bear markets are the opposite. A prolonged instance occurred in the 1970s when the stock market went down for more than a decade. Since this scares investors away from investing, it only perpetuates the downturned market, making it difficult to turn around.

This type of market will affect any investments you currently have, since they will begin to drop in price. This isn’t necessarily a bad thing if you don’t intend on selling your stock right away. In most cases, when left alone for prolonged periods of time, investments will right themselves when the market takes its spiral turn upward again. Other types of investors, like real estate investors, can even take advantage of a downturned market. This is also the time to buy into stocks that were once too high to afford, but look at companies that are going to do well a couple of decades down the road.

A good way to gauge this is to determine if the products or services offered will still be in use by the majority of people in twenty to thirty years. Load up on falling stocks while you have the opportunity to take advantage of the bear market, because history has proven that the prices will return to the levels at which they were before the downturn. Because of this, you could end up making quite a hefty profit from this kind of market if you play your cards right. Try not to fight this kind of market and sit tight until your investments work themselves out again.

About Richard Wilson