A bear market is a period during which the stock market declines for an extended time and investor confidence is low. It is generally defined as a bear market when a broad market index has fallen by 20% or more compared to a previous peak. It is therefore not a small temporary decline, but a clear downward trend.

In a bear market, caution dominates and more investors are selling than buying.

During a bear market, prices often fall due to economic headwinds such as a recession, high inflation or rising interest rates. Companies generate lower earnings or expect slower growth, which makes investors less willing to pay high prices for shares. This can create a chain reaction: falling prices lead to uncertainty, and uncertainty can lead to further selling. In this period, some investors choose to take so called short positions.

This means they expect the price to decline. They sell a share they do not yet own, with the intention of buying it back later at a lower price. If the price does indeed fall, they earn the difference between the higher selling price and the lower repurchase price.

Short example:

Suppose a stock index stands at 1,000 points. In the following months, the index falls to 800 points. That is a decline of 200 points. 200 divided by 1,000 equals 20%. Because the index has fallen by 20%, this is considered a bear market. If you had invested €1,000 in that index at the beginning, your investment would now be worth €800. If an investor had opened a short position at 1,000 points and bought back the index at 800 points, they would profit from the difference of 200 points.

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