Before learning about bearish trend or market, lets define the the term ‘stock market’. Stock market is a public institutions established with the aim of issuing, buying and selling the stocks that operate on the stock exchange or over the counter are known as stock markets. It is the place where investors can gain fractional ownership of the company through purchase and sell of securities like stocks and bonds.
Stock market functions according to the demand and supply of the stocks hence, it shows certain behavior i.e. trend. Trend determines the direction in which the market moves in a particular period of time. Stock market shows two trends; upward trend and downward trend. The upward trend is called bullish trend/market and downward trend is bearish trend/market.
The term ‘bear’ in stock market comes from attacking action of bear i.e. snapping down its claws which resembles the downward movement of stock market. Bear represents the investors who are willing to sell the stock due to future speculation of negative turn in the market. The market trend is determined by the numbers of bears and bulls in the market. If the number of bears are high, then the market is bearish.
The bearish trend represents the downward trend in the price of the stock. This trend shows the shift from investor optimism to investor fear and pessimism. According to some analysts, there is 20% or more decline in stock price during the bearish trend. There is no fixed during of such trend, it can exist for few weeks to multiple years.
Causes for Bearish Trend
Bearish trends are caused by different factors that can have an impact on the capital investment. The unexpected fluctuation in the social and economic condition of the country can have a direct impact on the performance of the company and its investment factors. For instance, poor and vague economic policy is directly associated to bearish trend.
Secondly, international relations between different nations affect import and export of domestic industries. This will have a direct impact on the profitability of the company. Lastly, recession can create pessimistic mindset among the investors. But more importantly, the mindset and feeling of the investors influence the market and its trend.
Characteristics of Bearish Trend
Bear markets or bearish trends have certain characteristics that show the direction of the market. Some of the characteristics are:
Declining confidence in the market
Declining confidence among the active investors and hesitant new investors reflect the bearish trend. The decline in confidence can be due to various reasons from personal to policy level. Whatsoever the reason, investors in bearish market lack confidence in security market and start pulling their fund from the market, impacting the market even more.
Increase in Interest rate
Increase in interest rate sometimes reflect the bearish trend. Often the central banks regulates the economy and inflation by adjusting the interest rate. Higher interest rate impacts investors at individual level and corporates at economic level. Higher interest rate affect earnings and eventually the stock prices. The cost of capital investment is high for corporates resulting low investment work, decreasing the stock price.
Higher interest rate in the market will allow investors to prioritize their spending and investment. Hiking interest rate discourages investment.
Declining trend in stock market reflects the bearish trend. During this trend, short selling is at peak. Short selling is a phenomenon in stock market operation where investors borrow security, sells it at relatively higher prices in expectation to buy the same share at low price.
Drop in IPOs
Decreasing confidence of investors, increase in interest rate, focused policy in priority sector less investment by investors. In such unfavorable environment, companies do not wish to go public in such underconfident market situation. IPOs announcement generally waits for bullish trend.