Almost every day in the investing world, you will hear the terms “bull” and “bear” to describe market conditions. Because the direction of the market is a major force affecting your portfolio, it’s important that you know exactly what the terms signify and how each affects you. This article will all about bull and bear markets.
What is a Bull Market?
Bull markets refer to the market going up aggressively over a period of time. As the market starts to rise, there becomes more and more greed in the stock market.
Basically, a bull market refers to a market that is on the rise. It is characterized by a sustained increase in market share prices. At such times, investors often have faith that the uptrend will keep up over the long term. Typically, in this scenario, the country’s economy is strong and employment levels are high.
What is a Bear Market?
On the other hand, bear markets are the exact opposite of bull markets. It’s a market where quarter after quarter the market is moving down about 20%.
Basically, a bear market is one that is in decline. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue, which, in turn, perpetuates the downward spiral. During the bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.
Where Did the Terms Come From?
The bear and bull markets are named after the way in which each animal attacks its victims. It is a characteristic of a bull to drive its horns up into the air. On the other hand, a bear, like the market bearing its name, will swipe its paws downward upon its prey.
Furthermore, bears and bulls were literally once fierce opponents, when it was popular to put bulls and bears into the arena to fight.
Historically, matches using bulls and bears (whether together or against other animals) took place in the Elizabethan era in London and were also a popular spectator sport in ancient Rome.
Bull Markets versus Bear Markets
“Bull” and “Bear” market describe how stock markets are doing in general – that is, whether they are appreciating or depreciating in value. At the same time, because the market is determined by investors’ attitudes, these terms also denote how investors feel about the market and the latest trends.
It’s important to remember that a bull market is characterized by a general sense of optimism and positive growth which tends to catalyze greed. A bear market is associated with a general sense of decline which tends to instill fear in the hearts of stockholders.
Characteristics of a Bull and Bear Market
Although we know that a bull or bear market condition is marked by the direction of stock prices, there are some accompanying characteristics that investors should be aware of. The following list describes some of those factors.
Supply and Demand for Securities
In a bull market, we see strong demand and weak supply of securities. In other words, many investors are wishing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to get available equity.
In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply and, as a result, share prices drop.
Because the market’s behavior is impacted and determined by how individuals perceive that behavior, investor psychology, and sentiment affect whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent.
In a bull market, investors willingly participate in the hope of obtaining a profit. During a bear market, market sentiment is negative as investors are beginning to move their money out of equities and into fixed-income securities.
Overall, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market – which, in turn, causes the decline in the stock market.
Change in Economic Activity
Because the businesses whose stocks are trading on the exchanges are participants in the greater economy, the stock market and the economy are strongly linked.
A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market values stocks.
In a bull market, the reverse occurs, as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.
So What to Do Then?
In a bull market, the ideal thing for an investor to do is to take advantage of rising prices by buying stocks early in the trend and then selling them when they have reached their peak. During the bull market, any losses should be minor and temporary. An investor can typically actively and confidently invest in more equity with a higher probability of making a return.
However, in a bear market, the chance of losses is greater because prices are continually losing value and the end is often not in sight. Even if you do decide to invest with the hope of an upturn, you are likely to take a loss before any turnaround occurs. Thus, most of the profitability will come from short selling or safer investments such as fixed-income securities.
There is no way to predict market trends, so investors would be wise to invest their money based on the quality of the investments. At the same time, you should have an understanding of long-term market trends from a historical perspective.
Both bear and bull markets will have a large influence on your investments, so it’s a good idea to take some time to determine what the market is doing when making an investment decision. Remember that over the long term the stock market has posted a positive return.
See Also: Bull Market vs. Bear Market
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