Loading the player...

What is a 'Bear Market'

A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market's downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increases. Although figures vary, a downturn of 20% or more from a peak in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over a two-month period is considered an entry into a bear market.

BREAKING DOWN 'Bear Market'

A bear market should not be confused with a correction, which is a short-term trend that has a duration of fewer than two months. While corrections offer a good time for value investors to find an entry point into stock markets, bear markets rarely provide suitable points of entry. This is because it is almost impossible to determine a bear market's bottom. Trying to recoup losses can be an uphill battle, unless investors are short sellers or use other strategies to make gains in falling markets. Between 1900 and 2015 there were 32 bear markets, averaging one every 3.5 years. The last bear market coincided with the global financial crisis, occurring between October 2007 and March 2009; the DJIA declined 54% during the period.

Short Selling in Bear Markets

Investors can make gains in a bear market by short selling. This technique involves selling borrowed shares and buying them back at lower prices. A short seller must borrow the shares from a broker before a short-sell order is placed. The short seller’s profit and loss amount is the difference between the price at which the shares were sold and the price at which they were bought back, referred to as "covered." For example, an investor shorts 100 shares of a stock at $94.00. The price falls and the shares are covered at $84.00. The investor pockets a profit of $10 x 100 = $1,000.

Put Options and Inverse ETFs in Bear Markets

A put option gives the owner the right, but not the obligation to sell a stock at a specific price on, or before, a certain date. Put options can be used to speculate on falling stock prices, and to hedge against falling prices to protect long-only portfolios. Investors must have options privileges in their accounts to make such trades. Inverse ETFs are designed to change values in the opposite direction of the index they are tracking. For example, the inverse ETF for the S&P 500 would increase by 1% if the S&P 500 index decreased by 1%. There are many leveraged inverse ETFs that magnify the returns of the index they track by two and three times. Like options, inverse ETFs can be used to speculate or protect portfolios.

RELATED TERMS
  1. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  2. Bear Position

    Alternate term for a short position in a financial security. ...
  3. Bear Market Rally

    A period in which prices of stocks increase during a bear market. ...
  4. Inverse ETF

    An exchange-traded fund (ETF) that is constructed by using various ...
  5. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  6. Covered Bear

    A trading strategy in which a short sale is made on a long position. ...
Related Articles
  1. Trading

    Profiting In Bear And Bull Markets

    There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage.
  2. Investing

    Prospering In The Next Bear Market: Here's How

    Prepare to survive, and even prosper, in the impending bear market, by considering and putting into action the following four strategies.
  3. Investing

    Bear Funds: A Bullish Stance On Bad Times

    Even if the market is in a decline your portfolio doesn't have to be.
  4. Financial Advisor

    Do Bear Market Funds Make Sense for Investors?

    Bear market funds have their place. But are they right for individual investors?
  5. Insights

    Digging Deeper Into Bull And Bear Markets

    Discover why it's important to know the characteristics of the two types of market conditions.
  6. Investing

    Adapt To A Bear Market

    Learn how your portfolio should evolve to suit bear market conditions.
  7. Investing

    Shorting an ETF vs. Buying an Inverse ETF

    Investors who want to bet against specific sectors or indexes can either short an ETF or buy an inverse ETF. Which is better depends on the circumstances.
  8. Investing

    Bear Market

    A financial market with declining asset prices fueled by investors’ pessimism, lack of confidence and negative expectations. While bear markets are partly based on actual investment performance, ...
  9. Investing

    Inverse ETFs Can Lift A Falling Portfolio

    These funds can reduce your exposure to market risk or enhance portfolio performance.
  10. Investing

    Play the Bear Market With Top Bear Market Funds (EUM)

    Worried of an imminent bear market? Play it safe with these top funds designed to benefit from declines in the stock market.
RELATED FAQS
  1. How do you use put options to profit from a bear market?

    Learn how traders use put options in their trading strategies to remain profitable, even in a bear market. Everyday investors ... Read Answer >>
  2. What are the signs of a bear market rally?

    Read about some of the signs of a bear market rally, an unpredictable bull movement that takes place in the middle of a stronger ... Read Answer >>
  3. What are common investing mistakes in bear markets?

    Learn why investing in a tumultuous market can be challenging even for the most experienced investors. Avoiding these common ... Read Answer >>
  4. How should young people invest in a bear market?

    Learn strategies young investors can implement during a bear market that present the greatest opportunity for long-term investment ... Read Answer >>
  5. How does a point change in a major index effect its equivalent exchange-traded fund?

    The S&P 500 and Dow Jones Industrial Index (DJIA) are two of the most well-known indexes tracking the movement of the U.S. ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center