A bull market is one in which prices
of a certain group of securities are rising or are expected to rise. It is a
prolonged period where the investment prices rise faster than their historical
average. In such times, investors have faith that the market will continue to
rise in the long term. Bull markets can happen as a result of economic
recovery, an economic boom, or investor psychology.
A
bear market is an opposite of bull market; it is characterized by falling
prices and an expectation that they will continue falling. When the market is
bearish, it leads to a slow down of economy together with a rise in
unemployment and inflation. In both the cases, people invest. Those who invest
in a rising market and think that it will continue to be so are called bullish
investors while those who trade in falling markets and think that it will
continue to be so are known as bearish players.
Though
bull and bear market conditions are driven by the direction of stock prices,
there are some other associated characteristics of these markets. However, one
should remember that the characteristics described in the following paragraphs
are not the fixed rules for typifying either bull or bear market and give just
a general idea to identify the market. In a bull market there is a low supply
of securities and a high demand for the same. This is because few are willing
to sell due to the rising trend of the market, expecting it to grow further. As
a result, share prices soar high, as investors compete to buy the available
equity. In contrast a bear market has more sellers and lesser number of buyers.
Bull and bear markets are very much impacted by the investor's psychology. It
is the tendency of the investor to buy when the market has a rising trend,
hoping to get more profit out of it. This leads to high prices and continuation
of the trend. When the market has falling prices, it shakes the investor's confidence
and he begins to move his money out of equities and starts selling out. This
leads to further falling of prices. As for the economy, stock market and the
economy are strongly connected. The businesses whose stocks are trading on the
exchanges are the participants of the greater economy. 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 evaluates 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. To
qualify as a bull or bear market it is supposed to be moving in its direction
for a sustained period. Small, short term movements do not qualify. Bull and
bear markets signify long movements of significant proportion.
There
are several well known bull and bear markets in American history. The longest
duration bull market was the one which began in 1991 and ended in 2000. The
best known bear market was of course the Great Depression. The Dow Jones
Industrial average lost roughly 90 percent of its value during the first three
years of this period.
There
are no set rules for investing in the bull or the bear markets, however in a
bull market the best thing to do is to take advantage of the rising prices and
buy securities early, watch as the prices rise and when they reach their peak
sell it .Though its not possible to predict with certainty when the prices will
reach their peak or bottom, investors are more likely to make profits in a bull
market. This is because on the whole investors have a tendency to believe that
the market will rise. As prices are on rise, any losses should be minor and
temporary. Portfolios with larger percentage of stock can work well when the
market is on rise.
Bear
markets are complete opposite of the bull markets. The chances of losses are
greater here as prices are continuously falling and the end is not in sight.
Investing in bear markets can involve many different strategies. This includes,
investing in less volatile securities such as fixed-income bonds or money
market securities. Another strategy investors employ is to wait for the
downward prices to reverse themselves. Some investors also turn to
"defensive stocks" whose performances are only minimally affected by
changing trends in the market. The food industry, utilities, debt collection
and telecommunications are popular defensive stocks. However, here also there
is no guarantee that the defensive stocks will perform well during any market
period. Bear markets also characterized by short selling. Short selling occurs
when the investor believes that prices of the stocks are going to decline, or
he believes the stocks are overvalued or because there is some fundamental
problem with the company.
To
conclude, there is no sure method to predict bull or bear markets. Investing in
both involves risks, and so investors should invest their money based on the quality
of their investments. At the same time it is important to have an understanding
of the markets and educating yourself to the trends. Since both the bull and
bear markets will have a large influence over the investments. There are
many investment methods which the investment professionals take
advantage of, such as dollar cost averaging, selling short and diversification.
Understanding these well founded strategies will surely improve the chances to
perform better in both the markets.
