Understanding what being bearish means is vital for anyone interested in the stock market. You should know what this market entails and what a bear investor is. Defining these terms will help ensure you have a strong foundation as a trader in the stock market.
This article will define both a bear market and a bear investor. It will help you know what it means to invest in such a market today. It will also provide a deeper understanding of the bear market phases, their pros and cons, and examples of bear markets.
Here's everything you should know about bearish in stocks.
What Is a Bear Market?
According to Investopedia, a bear market is when there’s a significant and sustained downward trend in the stock market. In a nutshell, a bear market is a situation in which the stock market experiences prolonged price declines of 20% or more from a particular point.
There are two significant ways to differentiate between bear markets; cyclical or long-term. A cyclical bear market can last for weeks or even months. On the other hand, a long-termbear market can last for several; years or even continue for decades.
As said before, bear markets are associated with price declines. One would think that investors would be affected by the price changes. Well, that's true, but there are various ways investors get through such times. Short selling, inverse EFTs, and put options are some helpful strategies.
What Is a Bear Investor?
That's your answer to the question 'what does bearish mean in stocks?' Next is to know what a bear investor is in the stock market. Bears or bearish investors are people who take advantage of the price declines in bear markets. They expect that the securities prices will change.
They make predictions using a wide range of factors. These factors can include fundamental market shifts, technical reasons, or even high valuations. Bear investors take short positions in the market to make profits from bear market situations.
You'll probably ask what a short position means. In this case, the bear investor sells securities to other investors at the prevailing market prices. They repurchase them later at lower prices and make profits. The only time this method can backfire is if the stock price increases.
Understanding Bear Markets
Knowing how to navigate the bear markets can be helpful to you. As an investor, you shouldn't exit the market when prices decline. Learning the art of surviving in such situations will help you make profits all year long. It will protect you from the effects of the causes of a bear market.
Investing in gold is comparable to using various tactics to survive bear markets. Many people purchase gold to protect their wealth during crises. Examples of crises include a sluggish or weak economy, pandemics, wars, etc. Buying gold bars or coins can protect you in such times.
In fact, you can take short positions in the gold industry to survive bear markets. Physical gold, especially bars, can get stored and won't lose value until you're ready to resell them. Therefore, you can buy it from reputable dealers like Acre, speculate on market prices, and then sell.
Phases of a Bear Market
Four significant phases of bear markets exist. They include;
- Investors have high sentiments thanks to the high securities prices in the market. The situation is, however, different towards the end of this phase. Investors begin to take in profits and drop out of the market.
- Almost everything starts to decline in phase two. This includes stock prices, trading activity, and corporate profits. Investor sentiments start falling, and some begin to panic.
- Speculators start entering the market in the third phase. Also, some stock prices increase, and trading activity rises.
- Slowly stock prices drop in the fourth phase. This attracts investors who enter the market. This situation then transforms the market from a bear to a bull market.
What Is a Bearish Stock Perspective?
Investors hold different perspectives at different times. Various factors impact the investors' mindset about the market at a specific time. A bearish stock perspective means that the investors believe there will be a decline in stock market prices or the market will struggle.
Some investors may decide to pull out of the market. Others stay and find ways to make profits from the declining stock prices. The opposite of a bearish stock perspective is bullish. This is where investors are optimistic about the stock prices and market in general.
What Are Bearish Stock Patterns?
Technical analysis of stocks can help you prepare for any upcoming changes. Various bearish patterns can make it possible to predict the stock market's future. But then, it is worth noting that bearish stock patterns do not always show that there'll be a bear markettrend.
Here are some bearish stock patterns.
- Bearish engulfing candle: It's when the previous day's close is lower than the new day's opener. In short, it means that the current trading session engulfs the previous one.
- Double top: It's when there's one high peak and another that's either near or equal to the high point and a valley in between them. Bearish is when stocks fall below the bottom price in between both peaks.
- Head-and-shoulders: It has three tops, with the highest in the middle. Investors expect the prices to decline when the stock drops below the neckline.
- Bear flag: It's marked by a sudden decline in stock prices. This is known as a flag pole, and trading in it has both highs and lows.
- Descending triangle: It's characterized by decreasing highs. These highs have similar resistance levels, and investors start to sell when prices fall below the resistance levels.
Bullish Vs. Bearish Stock Perspectives
We have already provided insight into a bearish market. To recap, investors feel that the prices of securities will drop in the future. A bullish stock perspective is the direct opposite of the bearish. Investors anticipate that the prices of stocks will increase in the future.
The investors' sentiments will determine the market's direction. Markets rise when investors are bullish and buy many stocks. Conversely, markets fall when investors are bearish and withdraw or tend to shy from buying securities.
Examples of Bearish Stock Markets
The US has experienced various instances of a bear market before. Here are some excellent examples of bear market situations in the US.
- 1929 Wallstreet crash that caused the great depression
- 1937 38 Recession
- 1971 Latin American Debt Crisis
- 1973 Oil Crisis
- 1987 Black Monday
- 1997 Currency Crisis
- 2000 Dot Com Bubble
- 2007-08 Financial Crisis
Advantages of Bear Markets
They enable investors to buy cheap, making it easy to profit. That's why you should have a bearish view rather than withdraw from the market in such times.
- It supports short trades. We have already mentioned short positioning explained what it entails. The bearish market favors it more than a bullish one.
- It helps push down stock prices which then enhances trading efficiency. Short trades can impact market prices faster than long-term trades.
- It enables investors to make more profits. Even though you can end up with losses in a bearish market, the profits are also massive if you implement the right strategies.
- It enables dollar-cost averaging. You can continue making systemic investment plans if you have a bearish mind, as you won't fear the bear market.
- It reflects the market sentiment. This makes it easy for people to prepare for the bear market, and that's why you witness a mass sell-off of stocks.
Disadvantages of Bear Markets
- It provides room for speculation, which can sometimes be costly. This is if you make a wrong bet that might lead to a massive loss.
- It leads to panic among investors, making some exit the market. In the end, this triggers a massive decline in the market.
- It's not the stock markets alone that get affected when trading activity declines. The economy, too, will go down, causing loss of livelihoods, business shutdown, and recessions.
Those are the pros and cons of a bear market. They should help you decide if you stay put when you start to see a market shift from bullish to bearish. The pros clearly outweigh the cons, making it a risk worth taking if you are an established securities investor.
Conclusion
That's all you need to know about bearish in the stock market. This article has provided enough insight to help understand bear markets better. You now know what it means to be a bear investor and how to make profits if you decide to take the bull by the horns.
We have also discussed the advantages and disadvantages of bear markets. In addition, you have seen examples of times when bear markets have occurred in the US. You can implement the insights shared here as an investor in the gold market.
Gold is perfect because it shields investors from various economic challenges. These are the same challenges that trigger bear markets; economic turmoil, wars, pandemics, etc. You can contact us to invest in gold bars and protect your wealth during such challenging times.
Sources:
Bear Market Definition: Phases & Examples | investopedia
Short Position (Meaning, Example) | wallstreetmojo
What's a Bullish Stock and When Should You Buy? | SmartAsset