What characterizes a bear market?

• A. Investor confidence is rising
• B. Overall market prices are increasing
• C. Investor sentiment is low and market prices are falling
• D. Market price volatility is high

Answer: (C)

A bear market is characterized by a prolonged period during which the prices of securities are falling, typically defined as a decline of 20% or more from recent highs. Investor sentiment is often low during these times, as fear and pessimism dominate the market environment. This can lead to decreased consumer spending, reduced profits for companies, and overall economic contraction, further driving market prices downward.

The dynamics of a bear market reflect the general expectation that prices will continue to fall, which leads to a pessimistic outlook among investors. In such an environment, traders may sell off their assets to avoid losses, reinforcing the downward trend in prices. This combination of falling prices and low investor confidence distinctly defines a bear market.