Bearish Market refers to an opinion with regard to the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. that it may go down or correct in the near term, in consideration of events that are happening or bound to happen, which would drag down the prices of the stocks in the market.
Examples of Bearish Stock Market
Given below is a brief list of bear markets in the US when the investor may be considered bearish on the stock market considering a downfall resulting in a drop in stock prices.
|1929||Wallstreet crash leading to the great depression|
|1971||Latin American Debt Crisis|
|2000||Dot Com Bubble|
- Buy cheap: Having a bearish view, an investor may look forward to a significant correction or downfall in the stock market as now he/she can buy low at a relatively lesser price and then thereby profit when the stock market goes up in value in the future
- Supports short trades: If an investor is of the opinion that particular security may decrease in value, he may prefer a short positionShort PositionA short position is a practice where the investors sell stocks that they don't own at the time of selling; the investors do so by borrowing the shares from some other investors to promise that the former will return the stocks to the latter on a later date. (Sell the stock by borrowing it) or may even buy a put option if he feels the security may go down in value. Hence it is this bearish view that facilitates and supports short trades.
- Facilitates Efficiency in Market: By enabling investors to go short on an index or a particular security or instrument the stock market, it facilitates efficiency in the market as the numerous short trades push down the stock price, which may converge towards its intrinsic value if it is considered, to go down as the case may be.
- Enables Profit-Making: When an investor or hedge fund manager spots a new opportunity that is likely to have the underlying go down in value, that goes on to facilitate profit-making and capitalization on such opportunities. Ex: Before the stock market crashStock Market CrashA stock market crash occurs when stock prices in all sectors begin to fall rapidly. It is often the result of global factors such as war, scam, or the collapse of a certain industry. In such a crash, panic acts as a catalyst. of 2007, many hedge fund managers happened to go short on the housing market and mortgage-backed securities, fearing a dip in value. It is this bearish view that helped them form an opinion, and it is they who did stand to gain in the event of the housing market catastrophic collapse.
- Facilitates Dollar-Cost Averaging: An investor who has a bearish view may continue Systematic Investment Plans (SIPs) into mutual funds knowing that stock market correctionsMarket CorrectionsMarket Correction is usually referred to as a fall of 10% or more from its latest high. It happens due to various reasons such as declining macro-economic factors, intense pessimism across the economy, securities specific factors, over-inflation in the markets, and so on. would enable dollar-cost averaging of investments and thus would not fear bear markets.
- Reflects Market Sentiment: It is true that the stock market is referred to as the economic barometer of a country. A bearish view or certain fear may trigger a mass sell-off of stocks. This would cause a significant downfall in the stock market. This downfall would be nothing but a reflection of the economic events in the country, which are reflected in the market sentiments of collective investors, which are then, in turn, reflected in the stock market decline.
- Market crashes: Sometimes, a bearish view of collective investors on the stock market due to panic or any one-off situation may trigger a massive decline. This would reflect poorly to foreign institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples. and foreign portfolio investors, and they may consider withdrawing their deposits and money from such a country that is undergoing such a phenomenon.
- Economic decline: Sometimes, stock market crashes may result in a huge economic decline because of which businesses may shut down, jobs may be lost, and there may be wide recessions which may also go on to have its repercussions on other economies and cause a global meltdown in worst-case scenarios
- Room for speculation: The investors with their bearish view tend to speculate a lot on the stock market with a strong belief that it will, for sure, go down in value. However, this speculative behavior may lead to a situation of wrong bets and massive losses to the investors if the markets don’t tend to go off in his bearish favor, rather keep increasing every time. Hence such display of such behavior may cause wide-scale phenomenal losses if bets go down south.
- It may require significant patience for an investor who is awaiting a stock market crash so that he/she can buy cheap. Given the consideration that markets are not efficient, it may involve significant time for the stocks to reflect the decline or downfall, and considerable time may have already passed by.
- Many of the investors are bullish in the stock market, and it would take a lot of grit, determination, and conviction to go against the conventional philosophy and method that is adopted by the bull investors who are predominant in the market.
Bearish Market is often the viewpoint of any investor with regard to a particular stock, instrument, or the whole stock market with a view that it would tend to go down in value. If successful, the investor may make a lot of money, or if his speculative position turns out wrong, he may often cause mass destruction by taking wrong positions on derivative instrumentsDerivative InstrumentsDerivatives in finance are financial instruments that derive their value from the value of the underlying asset. The underlying asset can be bonds, stocks, currency, commodities, etc. The four types of derivatives are - Option contracts, Future derivatives contracts, Swaps, Forward derivative contracts. . Bear markets cause economic collapseEconomic CollapseAn economic collapse refers to a severe contraction in the economy led by an extraordinary event (financial or structural) which is not a part of the normal economic cycle. It may lead to a decline in national growth, a rise in unemployment, and sometimes social unrest; therefore, it requires government or monetary authorities intervention., markets go down, businesses slow down, and even jobs may be lost.
However, some investors tend to profit from such a phenomenon as they believe it would be the right time to buy stocks and instruments at a relatively cheaper price and then manage to sell off when the market tends to bounce back. It is this bearish view that tends to bring out efficiency in the market by facilitating short trades on securities that the market thinks is overvalued, thus reflecting investor and also the market sentiment. Hence even though the bearish view is considered negative in respect of the stock market decline, it does go a long way in having to contribute towards an efficient market.
This has been a guide to what is bearish and its meaning. Here we discuss the examples of the bearish market along with advantages and disadvantages. You can learn more from the following articles –