Ever heard of a bull or bear market? If you are entering the realms of investment, you probably have - this is why we've compiled a guide to what a bull and a bear market is, and how you can use the information on market conditions that these terms describe making better investment decisions.
Bull and bear markets defined
A bull market refers to optimism in the financial markets in question. A market rise of at least 20% over two months is what generally constitutes a bull market. This is accompanied by general investor confidence and a sustained increase in company shares and a sense that this will continue over the long term. A bear market, on the other hand, is defined by an overall feeling of pessimism amongst investors. The market sentiment is pessimistic about new purchases and investments - in the worst case, this can lead to a recession or depression.
How to recognize a bull or a bear market?
Unemployment rates: A lower employment rate indicates that people can increase spending and thereby boost the economy. A boost in the economy is then likely to lead to a bull market. On the other hand, a high unemployment rate is likely to result in reduced spending because consumers are on a tighter budget until they are in employment again. This can lead to a long episode of a bear market, as consumer confidence tends to grow back slowly after a spell of unemployment.
Stock market: Looking at stock market prices can give you an idea of which way the wind is blowing. Don't just look at an individual stock price, but rather at the stock market as a whole. If prices are on the rise, this is likely to indicate a mood of optimism and confidence in the market with investors willing to purchase new shares. In this case, you are likely to be headed towards a bull market. If you notice falling stock prices, this is likely to be an indication of pessimism amongst investors and a shift towards a bear market.
Gross domestic product (GDP): Looking at the GPD can help determine whether you are headed towards a bull or bear market. A rising GDP figure is a sign of a growing economy and increasing corporate profits as it shows that consumers are spending. This is likely to indicate that a bull market is coming your way.
What's better for an investor?
There are benefits to investing in both a bull or bear market territory. Whichever route you decide to go down, being well-informed about which type of strategy suits which scenario is key.
Benefits of investing in a bull market
In a bull market, it is best to invest in stock early. This means you can then sell your shares when the market hits its peak. Bull markets tend to favour those who invest early. Long-term investment strategies are the thing to focus on - stock prices are likely to increase and losses are usually short-term. Also, bull markets tend to have a longer economic cycle or lifetime than bear markets .
Benefits of investing in a bear market
Compared to bull markets, there is more risk associated with investing in a bear market. Rally yourself and take the risk though, you might be rewarded. Using short-term strategies, purchase stocks at a lower price point and sell them when the market recovers. A popular strategy is to sell their existing shares when a bear market is likely to occur to then buy them back once their price has dropped.
Whichever investment strategy you choose, there will never be a guaranteed prediction of the future. This is why analyzing financial indicators carefully is key in managing your investments.