Spend, Save and Invest Smartly

Characteristics of a Bull and Bear Market



Approximately every day in the investing world, you will hear the terms "bull" and "bear" to describe market conditions. As common as these terms are, yet, defining and understanding what they signify is not so easy. For the reason that the direction of the market is a major force affecting your portfolio, it's important you know accurately what the terms bull and bear market really signify, how they are characterized and how each affects you.

Characteristics of a Bull and Bear Market

Even though we know that a bull or bear market condition is marked by the direction of stock prices, there are some complementary characteristics of the bull and bear markets that investors should be aware of. The subsequent list describes some of the factors that normally are affected by the current market type, but do keep in mind that these are not steadfast or absolute rules for classifying either bull or bear markets :

Supply and Demand for Securities

In a bull market, we can observe strong demand and weak supply for securities. In other terminology, many investors are willing to buy securities while few are willing to sell. As a result of this, share prices will rise as investors participate to obtain available equity. In a bear market, the opposite is factual as more people are looking to sell than buy. The demand is considerably lower than supply and, as an end result, share prices will drop.

Investor Psychology

For the reason that the market's behavior is impacted and determined by how individuals identify that behavior, investor psychology and sentiment are elementary to whether the market will rise or fall. Stock market performance and investor psychology are jointly dependent. In a bull market, most of the persons are interested in the market, willingly participating in the expectation of obtaining a profit. During a bear market, on the other hand, market sentiment is negative as investors are beginning to shift their money out of equities and into fixed-income securities until there is a positive move. In sum, the turn down 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

Since the businesses whose stocks are trading on the exchanges are the participants of the larger economy, the stock market and the economy are strongly associated. A bear market is allied with a weak economy as most businesses are not capable to record enormous profits because consumers are not spending nearly adequate. This turn down in profits, of course, directly affects the way the market values stocks. In a bull market, the reverse occurs as people have lots of money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.

How to Gauge Market Changes

The key determinant of whether the market is bull or bear is the long-term trend, not just the market's immediate reaction to a particular event. Small movements only symbolize a short-term trend or a market modification. Evidently, the length of the time period that you are screening will determine whether you see a bull or bear market.

Take for an example, the last two weeks could have shown the market to be bullish while the last two years may have displayed a bearish tendency. Thus, most have the same opinion that a decided U-turn in the market should be ascertained by the degree of the change: if multiple indexes have changed by at least 15-20%, investors can be quite certain the market has taken a different path. If the new trend does prolong, it is for the reason that investors perceive a changes in both market and economic conditions and are thus making decisions accordingly. Not all long behavior in the market can be characterized as bull or bear. Rarely a market may go through a period of stagnation as it tries to find pathway. In this case, a series of up and downward actions would actually cancel-out gains and losses resulting in a flat market trend.

What to Do?

In a bull market, the idyllic thing for an investor to do is take advantage of rising prices by buying early in the trend and then selling them when they have reached their max out. (Of course, determining accurately when the bottom and the peak will occur is impossible.) On the whole, when investors have a leaning to believe that the market will rise (thus being bullish); they are more expected to make profits in a bull market. As prices are on the climb, any losses should be minor and temporary. During the bull market, an investor can enthusiastically and confidently invest in more equity with a higher probability of making a return.

In a bear market, though, the chance of losses is greater because prices are continually losing value and the end is not often in picture. Even if you do make a decision to invest with the hope of an improvement, you are likely to take a loss before any turnaround occurs. Thus, most of the effectiveness will be found in short selling or safer investments such as fixed-income securities. An investor may also turn to defensive stocks, whose performances are only minimally affected by altering trends in the market and are therefore stable in both economic recession and boom. These are industries such as utilities, which are regularly owned by the government and are necessities that people buy despite the consequences of the economic condition.

Conclusion

There is no certain way to predict market trends, so investors should invest their money based on the class of the investments. At the same time, nevertheless, you should have an understanding of long-term market trends from a past perspective. For the reason that both bear and bull markets will have a large influence over your investments, do take the time to decide what the market is doing when you are making an investment decision. Keep in mind though, in the long term, the market has posted a positive return.

Capital Markets