What is a bear market?

Whenever there is a conversation about how one can garner immense wealth, the topic of ‘Invest in the stock market’ is brought up multiple times. Rightly so, as the Indian stock market has constantly provided hefty returns on investments, far more than any other financial instrument. The idea is simple: You earn through your active income, save as much as you can and invest the saved amount in good stocks that can appreciate along with delivering a dividend amount.

Although the idea seems straightforward, investors see their investments fall in value and their capital amount plunge. The amount they invested with hopes of multiplying gets divided by a huge margin which may take years to reach the break-even point. On the contrary, the stock market may start rallying, and the prices may rise by a significant margin, making the invested amount appreciate to double or triple in its value. These factors, called Bear or Bull, are common to the stock market and refer to the current market trend.

Between the two, this blog details the bear market in stocks and how one can understand the bear market meaning to ensure they can limit their losses.

Bear Market

A bear in the share market is defined as a situation when the prices of stocks decline and continue to do so for a prolonged time. The prices of stock may plummet by 20% or more. A bear market is generally associated with the stock market indexes such as NIFTY, SENSEX, etc., and their combined fall. If such an index falls, the stocks associated with it also fall, making it a bear market if the prices sustain at declining levels for a long time.

How does a Bear Market work?

The stock market is a direct reflection of the demand and supply forces and the economy of any country. If the stock market is referred to as bear, it could be because of factors such as slow economic growth, declining GDP, recession, geopolitical wars, pandemics, unemployment, high-interest rates, etc. Such factors create panic and nervousness in the mindset of the investors who may start selling their stocks for liduidity

Once a large number of investors start selling stocks, the supply of shares increases while the demand to buy them doesn’t, thereby lowering the price of the stock. If it continues, the price continues to decline, adding to the bear market phenomenon.

A bear market in stocks can last for several weeks, months, or even years. It depends on the triggering factor, and the time it takes for its resolution. For example, if a major sell-off happens in the stock market due to an outbreak of malaria, the bear market may get back to normal only after the outbreak is under control. Until it isn’t, the bear market may continue, and the prices may keep declining.

Phases of Bear Market

There are four main phases of a Bear in the share market. They are listed below:

1. High Investor Sentiment: Any bear market is backed by an initial bull market where the investor sentiment is high. High investor sentiment pushes investors towards buying more shares as the economic outlook is positive, and they believe the prices may rise higher. Such a market sees high stock prices that witness a steady increase in their value.
2. Low Investor Sentiments: This is when the economic factors or any other event trigger the investors’ sentiments to fall. Amid weak cues, trading activity, potential profits look below average, and investors start to panic. They, then, start selling the shares, fearing a decline in prices and their profits, resulting in a major sell-off. This is where the bear market begins, and the situation is called Capitulation.
3. Speculating: The third phase is where speculators enter the market in hopes of making profits from the heightened price movement. The situation leads to an increase in trading volume and the prices of stocks.
4. The end of the bear market: The last phase sees a drop in the prices, but the intensity of the decline reduces. The event that triggered the sell-off gets resolved, and investor sentiments become positive again. Once it does, the investors start buying stocks again and the market starts to climb along with the prices, leading to a bull market.

Market Correction v/s Bear Market

Investors who are without extensive knowledge of the stock market confuse a stock market correction with a bear market. As they are both completely different, confusing them with each other forces investors to lose a hefty amount and incur losses.

A market correction is a short-term event where the prices decline majorly for those stocks that are overvalued in price when compared to their financials. A correction may not go above two months and provide a good entry point for investors to buy a stock at a lower price and wait for the correction to end and the stock price to reach the same level again

However, a bear market happens because of an economic, political, geological, or natural factor and may continue for years. In such a situation, investors do not find any good entry point to buy a stock as the price may fall more and continue to do so for years. Hence, investors may lose their whole capital and end up with liquidity for a long period. A bear in the stock market is only good for short-sellers who make profits based on a stock’s price decline.

Bear Market: How to Invest in a Bear Market?

Most of your investments in a falling market require more than an efficient trading account. It requires patience, research, and most importantly, the right amount of market knowledge. To aid you in making the right investments during a falling market, here are a few important pointers you should keep in mind:

Now that you know what the bear market means and the bear market definition, you can manage your investments in a better way when the market becomes bearish. Bear stocks do not mean that you have to sell; it means that other investors are. If you have invested in good stocks after thorough research, the best thing you can do is to be patient and wait for the bear market to end.

• Do thorough research: It is always important to research the fundamentals of a company you are looking to invest in. But, when the market is in a particularly bearish trend, this research becomes paramount. Once you have narrowed down your choice of equity, spend an ample amount of time and effort going over the company’s management, business outlook, and overall financial performance.
• Buy low sell high: The classic recommendation of buying shares when the purchase price drops, and selling them when the prices rise, stands true for falling markets as well. In regular conditions, falling purchase prices for a stock can mean several things. The fundamentals of the company could be on a decline, or market sentiment could be poor. However, during falling market conditions, this might not be the case. Investors can buy even high valuation companies with good quality stocks below average purchase prices during a bearish trend. This can result in unique opportunities to earn significant gains.
• The margin of safety: Investors who value mitigating their market risks place great importance on the concept of Margin of Safety, or MOS. The Margin of Safety is essentially the difference between the market price of a share and the investor’s estimation of its actual, intrinsic value. Based on your risk appetite as an investor, you can set your Margin of Safety accordingly. It can serve as the point of difference between one stock and another during a falling market.
• Be Patient: When things get chaotic during a falling market, it can be tempting to jump on the bandwagon of any ongoing trend in the market. For instance, your friends and relatives might be panic-selling and encouraging you to do the same. However, keep in mind that every investment portfolio is different. Instead, it is recommended to stay patient, keep a keen eye on the fundamentals of your investments and act only as required. If you plan to hold your investments over the long run, it might be more prudent to hold onto them until the downtrend subsides.