The terms “bull” and “bear” describe how stock markets perform generally, but also indicates how investors feel about the market and the trends that emerge as a result. Bull and bear markets are common stock market terms.
Bull and Bear Markets
A bull market refers to a market that is on the rise, which is typified by a sustained increase in market share prices. As a result, investors often believe the uptrend will be longterm. Other indicators of a bull market are often a strong economy with low unemployment levels.
Conversely, a bear market is a market in decline. Share prices drop continuously, leading to a downward trend. Because investors believe this downward trend will continue, their actions help perpetuate the downward spiral and essentially create a self-fulfilling prophecy. An economic slowdown and rising unemployment usually accompany a bear market.
How Can I Identify A Bull or Bear Market?
Both bull and bear markets have one characteristic in common, which is they are both the product of long-term trends. Be careful not to look at short-term bumps in the road and mistake them for the sustained period of activity necessary for both bull and bear markets.
What Should I Do?
In a bull market, investors aim to take advantage of rising market prices by buying stocks early on and then selling them at their peak for maximum profit. The only problem with this approach is that nobody knows when the stock’s value has peaked until well after the fact. The risk is knowing when to pull the trigger before the downward slide, which usually happens fast. An active and aware investor should be able to minimize losses and use the overall bullish nature of the market to continue actively investing.
A bear market can be much more dangerous. The chance of losses dramatically increases because prices are continually falling and there is no way of knowing when they have hit rock bottom until it is too late. Most investments in a bear market aim towards a long-term increase in value preceded by periods of loss and uncertainty. Savvy investors often turn to short sales or sticking with relatively low-risk investments. Another preferred play in a bear market is to invest in what are known as defensive stocks, which include segments of the market that are usually immune to an economic downturn like utility companies.
Nobody knows when a bull or bear market begins or ends, making investing based on these criteria alone incredibly difficult for even seasoned investors. The best bet is to stick with investments you would typically make while remaining aware of the long-term trends that fuel market shifts. For most investors, the extended play is what’s important, so the investor who knows how to identify short-term trends and avoid a knee-jerk reaction will often come out on top.