When prices within the stock market fall drastically, this is called a bear market. A bear market isn't just limited to the world of stocks and shares – it's also used when talking about crypto and NFTs.
Many investors see their portfolio drop in value during a bear market, sometimes by over half. Of course, this isn't a good thing. For others looking to get started with investing though (or 'enter the market') a bear market can be a good time to get involved.
Naturally, a lot of people try to make money in a bear market by 'buying the dip' which involves trying to buy low and sell high once the market has recovered. Others may opt to continually buy each week or month to play it safe despite market changes; this is known as ‘dollar-cost averaging’.
Are we in a "bear market”?
The market has to drop around 20% for it to be classed as a bear market. In a really basic example, let’s say the Vanguard S&P 500’s share price is £60 and after two weeks it drops to £48. We’d class this as a bear market, as a 20% drop from £60 is £48.
Usually, if major indexes like the S&P 500 or Dow Jones Industrial Average fall 20%, it indicates we are entering bear market territory as they reflect the market fairly accurately. Bear markets can last for a few months or for the long-term, where in some cases like 2008 when it lasted for one and a half years.
Why is it called a "bear market”?
The first time I heard someone say bear market, I thought they meant a market that is bare and lacks anything worth getting excited about. I was wrong.
Those of you who are eagle eyed though will have noticed it is spelt 'bear'. When bears attack prey, they slash their paws from top to bottom, which is meant to resemble the direction of a falling market. I know what you’re thinking, I prefer my definition too…
If someone thinks a specific company isn’t going to perform well, then they can also say they are 'bearish' towards it without referring to the market as a whole. This can also apply to an individual crypto or NFT. For example:
“I’m bearish on Coinbase’s stock price this year, I don’t see it going up anytime soon.”
For a more optimistic read, check out what a bull market is.
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As with all investing, your capital is at risk.
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