Introduction
Bear market refers to the downward trend in the financial market where assets prices (such as stocks, bonds, commodities etc.) drop by 20% or more because of economic slowdown or declining investor confidence and widespread pessimism.
Key Characteristics Of Bear Market
* Assets price fall consistently over a period of time
* It creates fear, uncertainty and pessimistic sentiment among investors
* It occurs because of economic slowdown
* It reduces market activity due to low trading volume
* It increases market volatility
Pros Of Bear Market
The main advantages or benefits of bear market can be highlighted as follows:
1. Buying Opportunity At Lower Price
Investors can buy quality stocks or assets at discounted prices that increases the potential for long-term gains when market recovers.
2. Portfolio Rebalancing
Bear market provides opportunities to the investors to rebalance portfolios. They can remove underperforming investments and improve asset allocation.
3. Suitable For Long-Term Investing
Bear market encourages investors for long-term investing by discouraging short-term trading and speculation. So, investors can give focus on long-term growth.
4. Market Correction
Another notable advantage of bear market is that it corrects overvaluation of stocks and market bubbles during bull market that helps to create stable and realistic market. So, it can lead to heathier market that improves market efficiency.
5. Profit Making Opportunity
It provides opportunity to experienced short-term traders to earn significant profits through short selling strategy or buying put option.
Cons Of Bear Market
Some of the major disadvantages or drawbacks of bear market can be pointed out as follows:
1. Reduced Portfolio Value
One of the major drawbacks of bear market is that stocks prices fall consistently during this period that significantly reduces the portfolio value. So, investors have to face huge financial loss.
2. Difficult To Make Right Decisions
Because of high volatility and uncertainty it makes difficult for the investors to make right decisions. So, it may create panic and anxiety.
3. Lower Returns
Investors who seek quick returns on their investment are more affected by this financial market condition because market recovery can take very long time.
4. Reduced Confidence
Market sentiment becomes pessimistic that reduces business confidence. It becomes difficult to raise capital for the companies that makes difficult for expansion and growth.
5. Economic Slowdown
Because of lower market activities, lack of confidence and pessimism it negatively impact the economy of the country. It reduces consumer spending, increases unemployment rate and slows down the economic growth.
Opportunities And Risks Of Bear Market In Short
Opportunities:
* It encourages long-term investing because investors can buy quality stocks at lower prices.
* It helps investors to diversify and rebalance their portfolio
* Experienced traders can make profits from short-term trading
* Investors can identify strong and fundamentally sound companies in bear market because they survive downturns
Risks
* It reduces portfolio value because of decreased assets prices
* Creates fear, panic and anxiety among investors
* It reduces economic activity that leads to economy slowdown
* It increases risk because of volatility
It decreases consumer spending and reduces job opportunities
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