What is a bear market?
According to Anandrathi, a bear market is when markets (measured by Nifty50) falls below its long term average i.e.14 percent or more. A bear market witnesses widespread pessimism and negative investor sentiment.
Is a bear market a good time to invest?
In a bear market, indexes on the whole see declines, but there are possibilities of individual stocks not falling 20 percent or more. On the contrary, some stocks may rise even when the index is in a clear bear territory. Similarly, the index may not be in a bear market but certain stocks could well fall 20 percent or more and enter their own bear markets.
Usually bear markets are caused by slowing economies which are in turn caused by low job growth, dismal factory growth and contracted productivity.
Long term investors should in most probability use a bear market to buy their favourite stocks. It is a time that could be used to average out your holdings, i.e. bring the cost of your stocks down. For example, if you have 10 shares of Company X bought at ₹1 per share, your total cost of buying these shares is ₹10. However, in a bear market, if the share price falls to ₹0.80 per share and you decide to buy 10 more, then the cost of these new 10 shares would be ₹8. The average, thus, of your total shareholding would come to ₹18 for 20 shares instead of ₹20 if you had bought them in totality when the price was ₹1 per share.
What is the difference between a bear and a bull market?
A bull market is generally associated with optimism and growth whereas a bear market is associated with pessimism and negative sentiment.
Different phases of a bear marketThere are typically four phases in a bear market. First, high investor sentiments. This phase is marked by heavy buying in the stock markets leading to investors booking profits, or selling shares, once their targets are met. This then transforms into the second phase where stock prices begin to fall. Consequently, corporate profits follow suit and economic indicators too deteriorate. Here is when the third phase begins when speculators enter the market leading to some stock trading activity. In the last phase, even though share prices continue to fall, the drop slows till it reaches a point when investors start buying more stocks leading to bull markets.