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Understanding these terms can help you make a profitable stock investing decision. Not understanding them can set you on a path of making poor decisions that loses your hard-earned money.
In this article, we'll break down a bull market and bear market quickly so that you can understand the stock investing terminology.
Bull vs. Bear Market: An Overview
In simple terms, a bull or bear market explains whether stock markets are appreciating or depreciating.
The terms are derived from the way each animal attacks its opponents — a bull lunges its horns up (appreciating) while a bear swipes down (depreciating).
Because the market's direction is a vital force that considerably impacts your portfolio as an investor, it’s critical to understand how bull and bear market conditions affect your stock investments.
It’s important for beginner investors to understand that the market is constantly in a state of flux, and that both bull and bear markets are a part of the stock market lifecycle.
Let’s dive deeper into a bull and bear market to understand how you can incorporate it in your overall stock investing strategy.
What is a Bull Market?
A bull market describes a rise, of at least 20%, from a recent low in the stock market index.
During this period, investors are optimistic and encouraged that the uptrend will persist for an extended period.
To a considerable extent, investors' behaviors and sentiments will affect the trends of the market. Keep in mind that stock market performance and investors' perception or psychology are mutually dependent.
Hence, in a bull market, investors are willing to participate. There is a strong demand and weak supply of securities, meaning many investors are ready to buy securities and few are willing to sell.
This increased demand results in a strong economy, high employment, and an increase in share prices.
How Long Does A Bull Market Last?
Usually, bull markets tend to stay longer than bear markets — the longest bull market lasted from 2009 to 2020.
Bull Market Investing Strategies
Ideally, in a bull market, investors should buy and hold stocks – they should take advantage of increasing prices by securing stocks early in the trend and then sell when they reach the peak.
More so, during a bull market, losses are minimal and temporary; hence, you can confidently invest in different equities with a higher probability of making a profit.
What is a Bear Market?
On the opposite side of a bull market is a bear market, where securities prices fall 20% or more from recent highs. This occurs amid widespread pessimism and negative investor sentiment.
Typically, a bear market is caused by:
- a weak or poor economy
- market bubbles
- geopolitical crises
- low employment
- And more
All these, put together, can lead to pessimism and negative investor sentiment and psychology, meaning investors are not ready to buy securities, ultimately resulting in a decrease in share prices.
How Long Does A Bear Market Last?
Bear markets are usually short-lived. The average length is about ten months.
To date, the longest bear market happened from March 1937 until April 1942 — a time known as the Great Depression — and lasted for 61 months.
Bear Market Investing Strategies
In a bear market, prices are continually losing value with no end in sight; hence, the probability of losses is very high.
Investing during a bear market is not usually the best option. Even if you decide to while hoping there will be an uptrend, you will likely take a few losses before any surge occurs.
As such, the most profitable thing to do is short selling or safer investments, such as fixed-income securities. Or, invest in defensive stock sectors whose performance is a little affected by market trends fluctuations.
The Bottom Line: Bull vs Bear Market
Both bull and bear markets are part of the economic growth cycle.
As a stock investor, you’ll likely experience both on your stock investing journey.
If you struggle to remember the difference between a bull and bear market, keep in mind that a bull lunges its horns up (appreciating) while a bear swipes down (depreciating).
Understanding this term can help you make wise stock investing decisions now and into the future.