A bear market is marked by conditions where prices of securities are falling for a prolonged period of time. It is being prompted by massive pessimism and negative sentiment towards the market. Bear markets normally happen during a recession or a depression but not necessarily during a correction.
Recession and depression occurs when the market status is really bad caused by several reasons such as (but not limited to) unemployment, high inflation rates, bad business environments, political unrest, and even undesirable weather conditions and simply lack of interest in a certain security. A correction on the other hand is being caused most of the time by profit taking. It occurs on a bullish market wherein traders and investors exit their positions and secure their gains. A correction provides a good entry point for future potential gains because the market conditions are good and securities are most likely to go up. Entry points can be analyzed and predicted easily through the use of of different analysis schemes. On a recession or a depression, entry points are hard to find because the bottom is very hard to predict.
A bear market is what most traders hate and most investors love. Traders buy securities and hold them for a short period of time before selling them while investors buy securities and hold them for a long period of time. Since bear markets last for at least 4-6 months, traders may lose a lot of money if they continue to trade. The likelihood of investors losing a slimmer than that of traders because they rarely get involved in the buying and selling of securities.
A typical disadvantage of a bear market is prices of securities are going down. Since prices are going down, earning some gains are hard and the chances of losing increase tenfold. Going deeper, a bear market signify undesirable business and economic conditions, which, in most cases, slow down or stagnate economic growth. Nobody wants to invest or put money in something that is going down thus making it hard for the economy and securities to recover.
However, not all bad times last forever. History shows that markets always recover after a recession or a depression. A recovering market goes up typically as fast as how it went down. Some of the advantages of a bear market are:
1. It pushes security prices to go down making them cheaper. It provides good buying opportunities because most securities will be lower than their book or face value. It is believed that stocks will always go near or at their book value irregardless if they are undervalued or overvalued.
2. The momentum in going back up is strong. The market behavior is quite predictable. What goes up always comes back down and what goes down always recovers and goes back up. Interestingly, it continues to have the same momentum in going the opposite way thus if, in a bearish market, the market goes down fast, it will also go up fast. This is quite simple. As soon as the market shows some signs of recovery and strength, traders, investors, and businessmen will be back in action prompting the values to go up again, a typical supply and demand law.
3. Lessons learned. A bearish market is caused by several factors. Recently, the European debt crisis has made almost all markets fall and keeps them from going up. In 2008, the real estate crisis pushed the world into the brink of a recession pulling markets down big time but in the end, everybody learned a valuable lesson from that one. The same thing will happen in the European crisis. As soon as it is solved, markets will rise again and such mistakes will most likely be avoided in the future.
The bear market isn’t as bad as it really seems. In the stock market, other security trading, and even in typical and traditional businesses, it is more logical to buy stocks that are down, that is why most people flock on sales, because they are cheap. When securities are down, it is actually the best time to buy, not when it is trending up or going up. What goes down always goes back up so a bear market is actually a better buying opportunity. A little knowledge, patience, and discipline though are very much required.