An Overview of the Bull and Bear Markets
If you’re an investor, or an aspiring one, you may have heard the terms “bears” and “bulls” used in regards to the market conditions. These are words that you have to understand because the market direction will affect your portfolio.
Bear and Bull Markets: What Are They?
These terms are used to explain the direction that the stock markets are taking in general—whether their value is depreciating or appreciating. They also describe how investors are feeling about market trends because their attitudes determine the market.
To put it simply, a bull market is a market that is rising. It is characterized by a steady increase in price– in equity markets, for instance, the prices of firm’s shares. During times like these, investors are confident that this favorable trend will go on for some time. In such a scenario, the level of employment is high and the economy of the country is strong.
A bear market, on the other hand, is one that is declining. It has fallen by 20%+ from the recent highs. The share prices keep dropping leading to a downward trend. Investors expect the trend to continue. In a bear market, companies lay off workers resulting in high unemployment levels and the economy slows down.
Bull and Bear Markets: Characteristics
Although stock prices are the main characteristics of bear and bull markets, other characteristics accompany the trend. Check out some of them.
Demand and Supply for Securities
In a bull market, there’s a weak supply and strong demand. Not many investors want to sell securities but many wish to buy. This causes share prices to go up since investors are competing to acquire available equity.
The opposite happens in a bear market. More people want to sell and few want to buy. With the demand lower than supply, share prices decline.
Investor Psychology
Investor sentiment and psychology may cause the market to rise or fall. Investors participate willingly in a bull market hoping for profit.
In a bear market, their sentiments are negative and they move their cash towards fixed-income securities and away from equities. When stock market prices decline, their confidence is shaken and they are skeptical about the market.
Economic Activity Changes
The economy is strongly linked to the stock market.
A weak economy is a characteristic of a bear market. Consumers stop spending much money and businesses record less profits. A decline in profits will affect the market value of stocks.
In a bull market, people spend more and the economy strengthens.
Gauging Market Changes
To know whether the market is bear or bull, check its long-term performance. Small movements are usually a market correction or short-term trends.
Note: it is almost impossible to time the market perfectly.
How to React in Each Market
When the market is in bull, buy stocks as the trend begins and sell them when they reach the peak. Losses here are usually temporary and minor.
In a bear market, losses are almost inevitable. The best thing to do is short-sell or move to safer investments.
