The Motley Fool

What is a Bear Market?

stylised silhouette of a bear on financial graph background

During bear market periods, investing can be risky even for the most seasoned of investors.

A bear market is a period marked with falling stock prices.

In a bear market, investor confidence is extremely low.

Many investors opt to sell off their stocks during a bear market for fear of further losses, thus fueling a vicious cycle of negativity.

Although the financial implications of bear markets can vary, typically, bear markets are marked by a 20% downturn or more in stock prices over at least a two-month timeframe.

Bear market phases

Bear markets typically begin when investor confidence begins to wane following a period of more favourable stock prices.

As investors grow increasingly pessimistic about the state of the market, they tend to sell off their investments in order to avoid losing money from the falling stock prices they anticipate.

This behaviour can cause widespread panic, and when it does, stock prices can plummet.

When this happens, trading activity tends to decrease, as do dividend yields.

At some point during a bear market, investors will typically try to capitalise on low stock prices by reinvesting in the market.

As trading activity increases and investor confidence begins to grow, a bear market can eventually transition to a bull market.

Origin of the term “bear market”

The term “bear market” is named for the manner in which a bear tends to attack.

A bear will usually swipe its paws in a downward motion upon its prey, and for this reason, markets laden with falling stock prices are called bear markets.

Bear market vs. Bull market

A bull market is one marked with strong investor confidence and optimism. It is the opposite of a bear market, during which negatively prevails.

In a bull market, stock prices go up.

Like the term “bear market,” the term “bull market” is derived from the way a bull attacks its prey.

Because bulls tend to charge with their horns thrusting upward into the air, periods of rising stock prices are called bull markets.

Unfortunately for investors, bull market periods that last too long can give way to bear markets.

Bear market vs. market correction

A market correction is a period in which stock prices drop following a period of higher prices.

The idea behind a correction is that because prices rose higher than they should’ve, falling prices serve the purpose of “correcting” the situation.

One major difference between a bear market and a market correction is the extent to which prices fall.

Bear markets occur when stock prices drop 20% or more, whereas corrections typically involve price drops around 10%.

Furthermore, market corrections tend to last less than two months, whereas bear markets last two months or longer.