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Bear Markets

The bear market is usually accompanied by negative connotations and a bad feeling by investors.  Once this market trends hits, investors are motivated to sell in order to avoid further loss.  The most famous bear market in history was the Great Depression during the early 1930ís. A bear market can be described as a prolonged period of time where stock prices fall by about 20% or more, and are typically accompanied by words such as recession, unemployment, and inflation, thus the negative connotations mentioned previously.

The bear market is the opposite of the bull market and is due to a sharp decline in prices in the stock market as a result of a decrease in corporate profits.  This market trend can also be a result of overvaluation of stock prices which inevitably are corrected and fall to more appropriate levels.  The lower earnings caused by this market trend cause investors to sell their stock, which then drops the price of stock.  Other investors see this happening and they also sell creating the beginning of a viscous cycle.

One of the investing mistakes frequently made is when a bear market is mistaken for a correction.  The difference between these two market trends is that a correction is a much shorter duration of falling stock prices, whereas the bear market occurs over a longer time frame and to a greater degree of loss. A market correction at times can be a drop of 10 -20% over a short period of time.  Market corrections can also be a great opportunity for investors to make money playing in the stock market due to depressed prices and valuation.

If your intention is to hold your investments for decades, investing during stock market trends such as this, is an investing strategy you may want to research further. While there are negative connotations surrounding bear markets, those only hold water if you are planning to sell your stock immediately.  If you are planning on more long-term investment strategies, then falling stock prices and depressed markets are the way to go.  The reason for this is that it is inevitable that prices will return to a more reasonable price. When trading in the stock market during this market trend, you must research companies to find out which ones will have value 10 plus years from now. It is also imperative that you understand the companies you have chosen, from the stand point that the stock price and the business of the company actually have little to do with each other.

The opposite of a correction is a bear market rally. This market trend is a temporary increase during a bear market and is sometimes an increase of 10 to 20%.  It is extremely difficult to know whether this is taking place or whether a correction or a bull market will occur since it is a secondary market trend.  A secondary market trend is a temporary change in price during a primary trend.  It is difficult also to predict the market trend in that a correction will sometimes indicate a bear market. Experts investing in the stock market will spend hours predicting and debating over the next market trend.

 

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