Bear Market: Definition, Types, Causes, and Investment Strategies

A bear market refers to a market condition in which the prices of securities decline by 20% or more from its recent high for a sustained period of time. A bear market is accompanied by overall market pessimism and low investor confidence. Bear markets are characterized by a drastic decline in the demand for securities, resulting in a prolonged fall in security prices.

In a bear market, due to the decrease in demand, most companies and businesses face financial crunches leading to poor profitability and higher unemployment rates. The term bear market is generally used to refer to either an individual stock or the stock market index. 

Bear markets happen the investors in the bearish trend hold onto the securities until the movement turns bullish. Traders also utilise bear markets to benefit from short selling. Bear markets can be identified using four main criteria such as a fall in stock market indices, a recession affecting the economy, a 20% or more decline in security prices and overall market pessimism.

However, bear markets also encompass benefits, including serving as good opportunities for investors to assess their natural risk appetite, allowing investors to purchase securities at low prices, which can be traded later once the market trend reverses, and helping investors to learn to control their emotions and become enhance their trading and investment skills. 

Bear markets are classified into three types which are cyclic bear markets, structural bear markets and event-driven bear markets. Investors can utilise different investment strategies to benefit from every bear market. The four primary investment strategies used in bear markets include short selling, holding, inverse EFTs and put options. The five primary causes of bear markets include slow and sluggish economies, bursting of market bubbles, pandemics, corporate earnings, wars and geopolitical crises. 

What is a bear market? 

A bear market refers to a market condition in which the prices of securities decline by 20% or more from its recent high for an extended period of time. For a market to be classified as a bear market, the price of securities drop must drop 20% or more from its recent high. A bear market should usually last a minimum of 2 months or more.

A decrease in the demand for securities, low investor confidence and overall market pessimism accompany bear markets. The decline in demand also leads to negative growth rates and higher unemployment rates. It is also common for bear markets to be accompanied by an economic recession. In a bear market, the investors become more risk-averse. 

The term bear market is derived from the manner in which a bear attacks its opponent in the wild. Bears are known to swipe down their enemies with their paws. This swipe-down action was juxtaposed with the falling market trend, which was named the bearish trend. 

What is the term Bear Market most often used?

The term ‘bear market’ is most commonly used in two contexts listed below. 

1. Stock Market Index

A stock market index is a collection of equities from similar companies or those that match specific criteria such as share size or trading frequency. The stock market index monitors the performance of the stocks that constitute it. A stock market index reflects the overall market performance. A stock market index is considered a bear market if the majority of stocks in the index undergo a steady price decline of 20% or more. 

2. Individual Stock 

Individual stock refers to shares of companies that represent ownership in the respective companies. Stocks are issued by companies to raise funds. The stocks can be traded through stock exchanges to make a profit. A stock is said to be in a bearish trend if its price drops by 20% or more from a recent high value. In bear markets, the value of the stock undergoes a constant decline. 

What is the History of the Bear Market? 

The history of bear markets dates back to the early 20th century, with the most notable ones being the Great Depression of the 1930s and the 2008 global financial crisis. Bear markets are a part of every nation’s history. In the Indian stock market history, the first bear market that affected the economy significantly was the one that followed the Great Depression in 1929.

The great depression, which is considered the worst and most prolonged period of economic depression, was created by a bear market. The bearish trend that led to the Great Depression started on October 24. 

However, the world’s longest bear run was between 2000 and 2002. This bear market resulted from the bursting of the dot com bubble in the United States of America. 

Another significant bear market in the Indian stock market history was in the year 2008. The 2008 bear market and recession resulted from the collapse of the American financial institution, Lehman Brothers Holdings Inc. As a result of globalisation, this event triggered bear markets and stock markets all over the world. This bear market lasted for about two years. 

The most recent significant bear market was the one in 2020 that resulted from the coronavirus pandemic hitting the entire world. This bear market was, however, short-lived. 

What is the Longest Bear Run in History?

The longest bear market in modern history was the Great Depression, which lasted for three and a half years from 1929 to 1932. The stock market lost nearly 90% of its value, and unemployment skyrocketed. Other notable bear markets include the 1970s bear market, which lasted for nearly two years, and the dot-com bust of the early 2000s, which lasted for about three years. 

What is the Shortest Bear Run in History?

The shortest bear market in history was in 1987, known as Black Monday. It lasted only 3 months, from August to November, and was caused by a combination of factors, including rising interest rates and the failure of a few large financial institutions. Black Monday saw the Dow Jones Industrial Average drop by 22.6%, triggering a global financial crisis.

How long does Bear Market last?

The duration of a bear market can vary widely but typically lasts for months to years. The longest bear market in history was during the Great Depression, which lasted for three and a half years. The shortest bear market was Black Monday in 1987, which lasted only three months. They also present opportunities for long-term investors to buy quality assets at discounted prices.

How does Bear Market work?

A bear market works primarily through investment strategies specially designed for bear markets. Since bear markets are characterized by market pessimism, low investor confidence and declining prices, investors require strategies that best suit these conditions while investing and trading in bear markets. Investors either purchase low-price securities and then hold on to them until the market turns bullish or attempt to profit through short selling. 

In a bear market, there is a constant decline in security prices. A decrease in the demand for securities causes a decrease in prices. The bear market, thus, leads to poor performance by companies and poor confidence among investors. 

How does Bear Market characterize?

A bear market is characterized by a sustained decline in stock prices, typically defined as a drop of 20% or more from recent highs. Investor confidence is low during a bear market, and there is a general sense of pessimism about the economy and the future prospects of companies. Bear markets can be caused by a variety of factors, including a recession, political uncertainty, inflation, or a major market correction. 

What are the Characteristics of a Bear Market?

The four main characteristics of bear markets are listed below. 

1. A low investor confidence.

One of the key characteristics of bear markets is a steady decline in investor confidence. The price downtrend makes most investors reluctant to invest in securities, thereby decreasing demand for securities. 

2. An overall market pessimism. 

Bear markets are also characterised by market pessimism. Investors and traders have a pessimistic view of the market, and the economy is dull. 

3. A decline in the number of Initial Public Offerings. 

Another key feature of bear markets is a decline in Initial Public Offerings (IPO). An Initial Public Offering is a process by which private companies offer shares in their companies directly to investors. In a bear market, companies do not offer IPOs, further decreasing their value. 

4. A decrease in employment rates. 

A drop in employment rates also characterizes bear markets. The declining security prices affect companies’ performance and drag down the nation’s Gross Domestic Product. This results in a low employment rate. 

What are the Benefits of a Bear Market?

The three main benefits of bear markets are listed below. 

1. It allows investors to invest at low prices.

Bear markets provide excellent opportunities for investors to purchase securities and invest at low prices. Since bear markets are a period of continued price decline, investors can easily buy securities at low prices in a bear market. Investors can then hold on to the securities and trade them when the market trend reverses. 

2. It allows investors to learn about their natural risk appetite. 

Bear markets also allow investors to learn and assess their natural risk appetites. How investors cope with a bear market determines how they react in the face of a downtrend. By experiencing a bear market, investors learn how much risk they are willing to take and which equities and bonds they are comfortable investing in. 

3. It helps investors to control their emotions and enhance their trading skills. 

Bear markets help investors in controlling their emotions. Making trading decisions based on emotions involves the risk of incurring losses as the decisions are based on emotions such as temptation and fear. Instead, investors must ideally train themselves to think without their emotions influencing their decision-making process.

Bear markets teach investors to be patient, not succumb to fear, and make poor decisions. They teach investors to wait until they can make trades profitably. 

How can Investors Benefit from Bear Market?

Investors mainly benefit from bear markets by purchasing securities at low prices. Since prices of securities steadily decrease in bear markets, investors can buy bonds or equities at meagre prices. They can then hold onto the securities until the market trend reverses and the market turns bullish. This allows them to sell the securities at very high prices.

The investment strategy of buying securities in a bear market and holding on to them offers high profits. Investors can also use bear markets as learning opportunities to learn more about their risk appetite and the strategies they are comfortable with. However, bear markets are dull market phases with limitations that investors must be prepared to deal with. 

What are the Limitations of Bear Markets?

The three main limitations of bear markets are listed below. 

1. They lead to recessions and economic depressions. 

Bear markets often lead to recessions and economic depressions. Recessions and economic depressions affect entire nations as people suffer not merely from losses in the financial markets but also pay cuts. Recessions seep in and affect all strata of society as well as governments.  

2. They lead to high unemployment rates. 

Bear markets also lead to high unemployment rates. The decreasing prices lead to poor performance of companies, resulting in people losing jobs. During bear markets and bear market recessions, companies tend to terminate employees and put off hiring new staff. This creates a hike in the national unemployment rates.                            

3. They tend to decrease investor confidence in stock markets. 

Bear markets also tend to decrease investor confidence in stock markets. The declining prices in the bear market create a sense of uncertainty and overall market pessimism, which lowers investor confidence, often making them reluctant to invest in stock or other financial markets. 

What are the Types of Bear Markets?

The three types of bear markets are listed in the table below. 

What makes Stock Prices Rise in a Bear Market?

Stock prices in bear markets rise when speculators start buying securities in a bear market. Speculators are market participants whose strategy is to predict future prices and place bets to make quick profits. Stock prices rise in a bear market when speculators join the scene as it increases the trading volume and prices.  

What makes Stock Prices Fall in a Bear Market?

Stock prices fall in a bear market mainly due to investor sentiments. Once the bullish trend reverses, panic sets in and most investors are in a hurry to sell off their securities. Investors are also no longer interested in purchasing new securities. This plummets the demand for securities and creates a decline in prices. 

What are the Investment Strategies in Bear Market?

The two main investment strategies for bear markets are holding and short selling. Investment strategies that can be used in a bear market depend on three main factors, including the investor’s trading experience, risk appetite and the type of bear market that is currently present. 

Holding refers to the strategy where investors use the low-security prices in the bear market to purchase securities. Investors then hold onto the securities until the market trend reverses. They trade their securities at a high profit when the market turns bullish again. This strategy requires a lot of patience as the investors have to wait in the hope of the market turning bullish and security prices increasing. 

The other investment strategy that investors use in bear markets is short selling. Short selling involves borrowing shares at a low price and then selling them. Then when the prices drop further, the investors repurchase them and return them. Short selling is a precarious investment strategy which can lead to huge losses if the strategy does not work out.

The factors to be considered while implementing investment strategies in a bear market mainly include the investor’s risk appetite, the investor’s experience in trading, and the type of bear market. Strategies such as short selling as better suited to investors who are skilled and trading and have a high-risk appetite.

The type of bear market is also a deciding factor in which strategy to utilise, as some types of bear markets are short-lived. Bear markets formed due to bubble corrections, for instance, take longer to bounce back. In such cases, investors must be cautious when using the holding strategy, as the estimated security value plays a vital role in how much the price will increase initially. 

What are the Causes of a Bear Market?

The five main causes of bear markets are listed below. 

1.  Slowing or Sluggish economy

A slowing or sluggish economy is one that experiences little to nil economic growth. A slowing or sluggish economy is considered a dull period for most businesses and industries. As the pace of economic growth slows, the volume of investments in financial securities reduces, resulting in a drastic drop in the demand for securities.

Security prices drop due to the decrease in demand, creating a bear market. Slowing and sluggish economies also create a sluggish economies with declining Gross domestic product (GDP) and increasing unemployment rates. 

2. Bursting market bubbles, pandemics

An economic bubble is a financial situation in which the security price escalates far more than its actual value. Economic bubbles are usually formed at the end of bull markets when prices of the securities increase beyond their real value. Prices of securities decline when the bubbles burst, creating bear markets.

Pandemics which are worldwide occurrences of infectious diseases can also lead to bear markets. Pandemics create panic among investors, who then attempt to panic sell, fearing a stock market crash. This situation, too, leads to the formation of bear markets. Market bubbles create inflation in the economy and result in recessions when the bubbles burst. Pandemics also often lead to worldwide recessions, high unemployment, and economic setbacks.  

3. Corporate earnings

Corporate earnings refer to the performance of companies and the returns and profits they generate. Bear markets are created when corporate earnings are low, and the companies perform poorly. Changes to the management, demergers and poor financial performance lead to declining stock prices and earnings and create bear markets. 

4. Wars

Wars between nations can affect financial markets and often result in bear markets. Wars usually lead to event-driven bear markets, which are short-lived compared to other markets. Wars create panic, which leads to market crashes and bear markets. Wars also lead to economic hardships, scarcity, and financial crunches. 

5.  Geopolitical crises

Geopolitical crises are conflicts between nations or nation-states over the control of geographical and natural resources. Geopolitical crises include territorial disputes, disputes over energy, climate change, environmental issues, military conflict, deglobalisation etc. Geopolitical crises alter the normal relationship between countries.

It also creates an air of uncertainty which makes investors fearful and panicky. Most investors are reluctant to make trading and investment decisions during an ongoing geopolitical crisis. As a result, the demand for equities and bonds drops drastically, leading to a bear market. Geopolitical crises also affect the capital flow and employment rates within nations. 

How to Identify a Bear Market?

The four main ways to identify a bear market are listed below. 

1. A fall in the market index

Falling market indices signal the onset of a bear market. Market indices are portfolios with collections of specific types of securities that help to track the performance of securities, including stocks and bonds. A fall in the market index, whether a stock market index or a bond market index, signals poor performance of that particular market segment or the market as a whole.

2. A recession that affects the economy. 

In a bear market, the economy is in a contraction phase with a decreasing GDP and a growing unemployment rate. The demand for securities decreases in a bear market, and corporate gains start falling. 

3. A 20% or more price decline in securities.

Price declines of at least 20% that last for a minimum of two months also signal a bear market. Any price declines of less than 20% are not considered bear markets, and these are merely market corrections. 

4. An overall market pessimism. 

Bear markets are also charcterized by overall market pessimism. During bear markets, investors prefer to sell their securities rather than make new purchases. 

While investing in a financial market, investors must be aware of whether the market is in a bearish or bullish trend. 

How to Invest in Bear Market?

The five main aspects to focus on while investing in bear markets are listed below. 

1. To diversify the investment portfolio

It is important to diversify the investment portfolio while investing in a bear market. The risk of incurring losses can be reduced when the investment portfolio is diversified across different assets. The chances of all asset classes performing badly simultaneously are minimal. Making some investments in fixed-income securities helps to spread the risk involved in bear markets. 

2. To hold the securities 

Another critical aspect to follow is to hold on to the securities in a bear market. Selling securities in a bear market is not advisable as there’s a high chance of incurring huge risks. Instead, investors need to wait out the bear market and sell once the asset prices are on the rise again. 

3. To continue investing 

Investors must also keep investing in a bear market as it offers an excellent opportunity to purchase low-price securities. By following this strategy, investors can reduce the cost of investing and make good returns when the bearish trend reverses.  

4. To research before investing 

Before investing in a bear market, investors need to undertake market research to invest in companies with sound financials, stable management and good quality products and services. Companies with sound financials generally remain strong even during unfavourable economic conditions. Investors must also be aware of the current market scenario and the various phases of a bear market.

5. To make longer-term plans for investments, 

It is also essential to have long-term investments while investing in bear markets. The primary strategy must be to purchase assets at low cost and sell them at high prices. Investors must avoid giving in to emotions and selling the securities at the first sign of a price drop. They must instead strategise to invest long-term and sell only when the prices are high. 

What are the Phases of a Bear Market? 

Every bear market comprises four main phases, which are listed below. 

1. The first phase of a bear market is when the asset prices are high, and the demand for the assets is high. At this stage, there is high investor confidence. At the end of this phase, investors start selling their securities, dragging the prices and demand down. 
2. The second phase of a bear market is known as the capitulation phase. In capitulation, asset prices drastically drop, and investor confidence takes a big step back. The economy slows down, and company profits start to drop. It is this phase of the bear market that creates panic among investors. 
3. The third phase of the bear market is the phase where speculators start to take part in the bear market. Speculators are market participants who bet on upcoming changes in market trends with the hopes of making profits. The prices and trading volume start increasing when speculators join the bear market scenario in the third phase. 
4. The fourth phase of the bear market is the last phase, where the pace of the price drop slows down. The low prices, which are stabilizing, attract investors, and the demand for the securities starts to increase gradually. The prices also start to rise, and progressively, the trend reverses. A bull market is created once the trend reverses.  

What is the difference between a Bear and Bull Market?

The five main differences between a bear and bull market are listed in the table below. 

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.