by Charlotte Wood
(last updated February 21, 2009)
In the world of investing you hear all these different terms thrown around that you may not completely understand. This lack of understanding can definitely hinder you in your quest to invest. If you can understand what a bear market is, then you'll be well on your way toward a better chance at investment understanding and success.
A bear market, in a few words, is simply a decline in the market—however this decline has a bit more meat to it. The bear market is not only a decline in the market, but a sharp decline in prices over a specific amount of time. During a bear market, sellers will sell as much as they can as a response to the initial drop in stock prices. This usually results in a chain reaction and can lead to something like the Great Depression in the 1930s. The biggest bear market in US history was between 1930 and 1932 right after the stock market crash.
Much of a bear market depends on attitude; the substance of a bear market comes from the investors' response. When investors see a significant threat to the market, they panic and then panic leads only to more panic, creating a bear market where everyone's trying to sell and no one wants to buy. Bear markets deal with investors' emotions and financial fears and that's how they grow and escalate. These kinds of markets have a bad tendency to spiral into ruts which are hard to remedy.
The results of a bear market can be relatively mild (like a period of a few years where the market is slowly, but steadily declining. However, bear markets can also be detrimental to the stock market at large, at worst completely devastating the market and countless others' finances as well, as demonstrated in the Great Depression. As an investor you'll need to watch the market carefully looking for signs of market panic so you can protect your money. If you're lucky the market will stabilize and all will stay okay, but you do need to be on the lookout.
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