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Bear market

A bear market is period of time in which the overall trend of the stock market is down.

Expanded Definition

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A market that falls significantly and consistently from its peak is referred to as a bear market. Conventionally, the threshold for declaring a bear market is a 20% drop from its peak. A drop of less than 20% is referred to as a correction.

The crash of 1929 began what is arguably the most famous bear market in American history.

A bear market can be a difficult time for retail investors, because they're faced with the prospect of watching their investments decline in value day after day. This can lead to impulsive selling. During a bear market, investments on margin will require more cash to cover the broker's minimum margin requirements, which may force an investor to sell stocks he or she would rather keep in the market.

Foolish investors will take a calmer view of a bear market, and will often see it as an opportunity to buy good companies at a cheaper price. They believe stocks should be sold if the investment thesis has changed or if they need the money, but not just because the market has lowered the current price being offered for the shares.

Bear markets are a test of investor patience, since nobody knows how long each one will last. However, they are often seen in retrospect as the periods when the stock market offers the best opportunities to make long-term gains.

Some say the term "bear market" comes from "bear skin jobbers," who sold bear skins before they caught the bears. This term eventually was used to describe short-sellers, who make money buying and selling shares that they don't own (they borrow them). Short-sellers profit when the price of their shares goes down. The theory further goes that since bear baiting and bull baiting were common "sports," bull became the counterpart of bear.

Others will say the term bear comes from the fact that bears swipe their paws down when fighting, whereas bulls swipe their horns up.

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