Have you ever heard the term “bear market” and you had no idea what that meant? No, we’re not referring to a market nearby selling Grizzly bears. In reality, it’s a term referring to the financial markets. As frustrating as financial jargon can be, it helps to understand the basic principles. In this article we’re going to do a deep dive to help you understand what a bear market is and how to use the term correctly.
The Psychology of Bears
The first thing to understand is there’s two sides to every financial transaction: a buyer and a seller. Now let’s think about each of those from a psychological standpoint. The buyer is an optimist, he feels good about the future and foresees a prosperous business endeavor. Conversely, the seller is a pessimist, he wants out of this transaction and needs the cold hard cash.
So what does this have to do with a bear market? In the jargon of stock-market traders there is a specific term for both buyers and sellers. Bears are the pessimists, the sellers, and bulls are the optimistic buyers.
This dynamic lies at the heart of the term “bear market.” Anytime there are more sellers than buyers, the market tends to go down and the bears are in charge. And here’s where the term can be used: any prolonged period of selling is considered a bear market.
In fact, the U.S. Securities and Exchange Commission has a specific definition of a bear market: a market that moves down 20% or more from a recent peak triggers an “official” bear market. On the contrary, a move up in price of 20% or more constitutes a “bull market.”
The Origin Story
While there is some debate about the origins of the term, according to Merriam Webster, it originated from a proverb warning that it is not wise “to sell the bear’s skin before one has caught the bear.” As the story goes, eventually that was applied to stock traders who borrowed stock expecting the price to go down in order to sell and make a profit later. These traders were known as bears.
It’s unclear when the bulls showed up later in history, but the animal appears as a fitting alter ego to the bear.
Today, these terms are so widely accepted now they have crossed the rubicon from financial slang into mainstream, pop-culture icons. A great example is the famous bull statue in front of the New York Stock Exchange, which, in its own right, became a tourist attraction, while also featuring in endless Hollywood productions.
What these terms boil down to is the psychology of market participants. Investors that are negative about future prices are firmly in the bear camp. If you have enough bears in the market pushing prices down you’ll eventually enter into a bear market.
On the other hand, if you’re an investor that’s “bullish,” then you’re fighting the bears with your buy orders, hoping for a bull market.
This ultimately begs the question: are you a bear or a bull?
Before You Go…
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