Bear Market

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Definition of a Bear Market:

A bear market is a market when the average share price decreases over an extended period, causing the market indexes to move lower.

Detailed Explanation:

Expectations of future profits drive stock prices. Assume a slowing economy results in lower profits, which in turn trigger companies to lay off employees. People cut consumer spending because they have been laid off or are concerned their income will decrease. The cycle repeats itself. Investors want to sell their shares of stock because they are concerned future earnings will decline. 

A bear market occurs when pessimists rule. During a bear market, most prices on the stock market fall because more investors are interested in selling than buying. This results in falling share prices over an extended period of time. Bear markets are illustrated by a rightward shift in the supply curve because more shares are available for sale at every price. This decreases the market indices.

Bear Market Chart

In contrast, a bull market occurs when optimists rule. Assume a growing economy has increased consumer demand and companies are expanding to keep pace. Employment is rising. People are feeling confident and purchasing items they have put off, such as a new house or new car. Profits increase. The future is bright. Stock prices are rising, and the trend is expected to continue. This is a bull market because there is an extended period of rising stock prices.

Stock prices are rising because buyers outnumber sellers, and the demand for stocks is increasing. Optimism may be spurred by optimistic global outlooks or encouraging national economic news. Normally bullish markets occur when the economy is growing, employment is increasing, and inflation is in check.  

Supply and Demand stock market graph
A simple way to remember the terms bull and bear markets is to think of the way bulls and bears fight. A bull thrusts upward with its horns, while a bear swipes downward with its paws. 

It is important to note that the price of a specific stock may fall during a bull market or rise in a bear market, so it is still important to acquire stocks for sound financial reasons. Furthermore, a one-week increase in prices due to encouraging news does not constitute a bull market. Nor does a short-term increase in prices during a bear market mean a bear market has necessarily ended. 

Dig Deeper With These Free Lessons:

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