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Everything You Need to Know About The Bear Market

What is Beer Market?

A bear market exists when a financial market experiences a long-lasting decline in value. Bear markets typically exist in situations in which securities prices fall by as much as 20 percent, if not more, after a recent rise. Pessimism characterizes the market and investor sentiment is negative.

Bear markets are often linked to downsides within the overall market or in an index like the Nifty 50. That being said, individual securities and commodities may also experience a bear market presence if they see a decline of 20 percent or more for a longer time frame – typically for a period of two months or more.

Bear markets can arise or exist with conditions in which the overall economy experiences a downturn which can be in the form of a business downturn. Bear markets can be viewed in comparison to their upward moving counterparts, bull markets.

Beer Market Understanding What’s Essential in the Beer Market

Stock prices usually give an indication of what the expected future of cash flows and profits from a given company will be. In case of undermining growth prospects and expectations, a fall in share prices may be seen. Furthermore, the herd mentality, fear and haste to make up for losses caused by a downtrend, each of these can contribute to a fall in asset prices in the long run.

Although several definitions of the bear market exist, one stipulates that it tends to rise when stocks fall by an average of 20 percent. However, this is an arbitrary number. Bear markets can also be defined as those in which investors are more likely to protect themselves from risk and averse to risk rather than seek risks in the market.

Bear markets are able to last for months if not years during which investors avoid speculating and instead look for boring, more reliable bets.

While there are many factors that can lead to a beer market, most often, a sluggish economy or one that is weak can lead to a beer market. An economy in decline is characterized by a number of factors, including low rates of employment, low levels of disposable income, poor productivity and declining business profits. In addition, government interventions in the economy are also capable of causing a beer economy. For example, changes in the tax rate could trigger a beer market. Going forward, in the event that investor confidence declines, this could signal the start of a bear market. If investors believe that a certain outcome is likely to happen in the near future, they act accordingly. In this case, they often sell their shares to avoid any loss.

Bear markets can last from several weeks to several years.In contrast, cyclical beer markets can usually last for a few weeks or several months.

Understanding the Stages of the Beer Market

Beer markets are often identified with four distinct phases which are as follows.

Phase one is made up of higher prices that have heightened investor sentiment. However, as this phase ends and reaches its end investors start exiting the markets to take their profits.

Phase two involves a sharp drop in share prices, a drop in trading activity and a decline in corporate profits. In addition, economic indicators that previously could have been positive begin to fall below the average. Some investors may start to worry or panic while investor sentiment begins to decline. This phase of time is known as surrender.

Stage three is when speculators begin to enter the market, causing some of the price to move along with the trade volume.

Phase four serves as the final stage and involves the continued decline in prices, albeit at a slower pace. Lower prices and positive news begin to pique investor interest once again resulting in a bear market paving the way for a bull market to begin.

Short selling during the beer market

Investors are able to make profits during the bear market by taking advantage of short sales. This strategy requires the sale of borrowed shares which are then bought back at lower prices. This strategy is extremely risky and can lead to huge losses if everything does not go according to plan. Short sellers have to borrow shares from the broker before placing a short sell order.

Contrasting ETFs and Puts During the Bear Market

With the help of a put option, investors and traders alike have the freedom to sell a particular stock at a specified price on or before a specific date without being tied down with the desire to sell it. When bear markets do not exist, it is generally safer to buy puts than to engage in the above short selling. Opposite ETFs work by shifting prices in the opposite direction of the index they follow.

Conclusion

As proved above, beer markets can last for long periods of time from a few months to several years. Investors can take advantage of short selling, put options and contrast ETFs to make money during bear markets with falling prices.

About the Author- Gaurav Heera is a stock market analyst & trainer with many years of experience in the field. He also heads DelhiCourses, an institute known for its best Technical Analysis Course in Delhi.

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