Investors are well aware of the fact that a bear market is one where share prices have declined. On the other hand, when the stocks are high, this is commonly referred to as a bull market. This article highlights the true definition of a bearish market and what causes the stock market to crash.

Understanding the Basic Principle

A bearish market is realized whenever there is a lengthy period through which stock prices keep on plummeting. Describing such a condition is often represented by a situation where stock prices decline by over 20 percent from their recent highs. This is usually accompanied by a pessimistic atmosphere from the investors. These markets could also be represented by a reduction in the market index, such as the S&P 500.

Individual stocks that have undergone a price decline of upwards 20 percent within an extended period could give rise to a bearish market. The period could be anywhere from 8 weeks or more. These markets are also prevalent whenever there is an economic crisis or a recession. As an excellent illustration, we take the example of Nasdaq Composite, which found itself in a bearish market between 1999 to 2000.

This came about as a result of the dot-com frenzy within the same period. Another great example would be a single stock entry that sees a decline of over 30 percent. This stock price is considered to be in a bearish market environment.

What Causes a Bearish Market?

Uncertainty and fear among investors are the usual causes of a stock market crash, although several other possible reasons exist. Whereas the international COVID-19 crisis fueled the most recent bearish markets, other previous causes have included debt-distressed investing, oil price movements, extensive investor speculation, reckless lending, among other factors.

What You Need to Know About Investing in a Bearish Market

Bearish markets are a difficult period for investors as no one wants their portfolio value to decline. On the other hand, such markets present investment opportunities. Since the stocks trade at a discount, it would be best to leverage your money in the long run. In light of this, here are a few rules that you can use when investing in a bearish market:

Make Long-term Goals

In a bearish market, you need to make rational decisions despite the market movements. In the long run, investors tend to underestimate the general stock market considerably. The main reason why this happens is due to the quick movements in the stock positions. When the stock crashes and appears to be falling continuously, people instinctively think it is better to sell before the situation worsens. 

On the other hand, in a bullish market, people tend to put their money in the market as they fear missing out on the profits. The primary objective when it comes to investment is to purchase low and then sell high. However, reacting emotionally to changes in the market can bring about the opposite effect. Invest in the stocks you would like to have in the long haul. You may want to hold on to them instead of selling due to their price decline in a bearish market.

Concentrate On Quality

Firms often declare bankruptcy whenever there is a hit on bearish markets. Overleveraged companies or those that lack any actual competitive benefits tend to take the hugest blow in an economic crisis. At the same time, high-quality corporations do so much better in comparison. It is crucial to concentrate on firms with long-lasting competitive benefits and impressive balance sheets in times of uncertainty.

Avoid Timing The Market Bottom

Any attempt to catch the bottom would be a lost cause. In a bearish market, you must remember that the market bottom is not the time to invest. Think long-term and purchase stocks for businesses that you want to own for a lengthy period. 

Establish Positions With Time

The strategy runs parallel to the previously mentioned tip. It would be best to gradually grow your stock positions even though the prices are at their lowest. By doing so, you can leverage the lower prices if the stock prices continue to decline. It is a better strategy as opposed to remaining on the sidelines.