A bear market is defined as a decline in the stock market, normally by 20 percent or more over an extended period of time. There are a number of factors that may cause this decline in market value. These causes include market corrections, the loss of corporate profits and the sale of stock equities. By watching for these causes an investor may predict a possible beginning to a bear market.
A market correction is when the stock market drops in value as a result of over pricing. If the market has become too expensive for new buyers to buy in, a market correction may occur. This market correction will drive the price back down to a rate where buying can resume. If the market corrects down to around 20 percent of its value, this would be considered a bear market.
A decrease in corporate profits can also be the cause of a bear market. Lowered profits for a corporation will result in a reduced value of their equity which can drive the market down. If this loss in profit is not contained in a single sector but is widespread this can cause either a market correction or an equity sell off, both of which can be cause for a bear market to occur.
Maybe the greatest indication of the beginning of a bear market is the continuous sell off of corporate stocks. There are numerous reasons that can lead to stocks sell off. Either from lack of confidence in the market, large corporate losses or a major world event such as war or government defaults on their loans; investors react to these negative influences of market price by taking their money out of a market they feel is too risky. As more investors remove their money from the market, this has an amplifying effect on market selloff. As prices decline, more investors sell their equities to protect their own investments. This next set of sell offs reduces the market value even more causing additional sell offs. This cycle continues until the value of the market is low enough that investors are willing to risk reentering the market, triggering an end to the bear market.
The sale of stocks, decrease in corporate profits and market corrections are all possible causes of a bear market. These events may work independent of each other or in a combination to cause this extended period of market value decline. Knowing these factors that are the cause of this pattern of decline is important for investors because they can also be used as an indicator of predicting a coming bear market in the future.