You likely already know that the stock market goes up, and down, and then up again. Investors would like to see it go up all the time, but that’s not the nature of the beast. When the market falls, you’ll often hear the pundits talk about a “bear market.” But what exactly is a bear market, and can you still make money in one? Here’s what beginner investors need to know about bear markets.
Definition of a Bear Market
A bear market is “a time when stock prices are declining, and market sentiment is pessimistic,” according to the U.S. Securities and Exchange Commission. A bear market generally occurs when a broad market index falls by 20 percent or more over a minimum two-month period.
Stocks routinely fluctuate — this is one of the basics of investing. A 20 percent decline can be shocking to investors, but a bear market is part of a typical market trend. In fact, bear markets happen about once every three and a half years.
As the stock market proceeds through its cycle, it goes up until investors think stocks are too highly valued. Then they sell their positions, and the market goes down. It goes down far enough so that investors think stocks are a bargain again, and they start buying, driving prices back up. This is Investing 101, and it is a natural part of market trends.
Bear vs. Bull Market: Here’s the Difference
Can You Make Money in a Bear Market?
Bear market investing has been around as long as bear markets. Although the temptation might be to pull your money out of the market and stuff it in the mattress, most experts caution against this. Although your portfolio might decline during a bear market, you want to be sure you’re still invested when prices start to rise again. And continuing to add to your investments during a bear market means you’re getting securities at bargain prices.
Why Is It Called a Bear Market?
The term “bear market” came from a proverb that said that it is not wise to sell the bear’s skin before you’ve caught the bear. When stock speculators began to sell borrowed stock at a future date, in the hopes that the price would decline and they could fulfill the order at a cheaper price, they began to be known as “bears.”