Bull Market vs Bear Market: What’s the Difference?
Bear and bull are common terms in the stock market that describe the current market conditions and whether it’s trending one direction or another. Because the market has a major impact on the market prices and your portfolio, it’s important to understand what the terms mean and how exactly they can affect you. Having a better understanding of bear and bull markets also allows you to make better investment decisions if you find yourself in one of these markets.
- A bull market is one where the prices are going up and investor confidence is high.
- A bear market is when the market prices are going down and investor confidence is negative.
- You can take advantage of pricing fluctuations in both types of markets to make a great income.
What’s a Bull Market?
A bull market is when prices on the market are going up or are expected to go up. It’s traditionally believed that the term comes from the way the bull attacks, by swinging its head upward and attacking with its sharp horns. This upward swing represents the upward trend of the market. Bulls also tend to be lively and even ferocious, much like an investor when they see market prices starting to go up.
A bull market is characterized by investor confidence and optimism. While there is no specific metric that defines when the market is bullish, most investors refer to a bull market as one in which the stock prices go up by 20%, often after a 20% drop and before a second 20% drop. Bull markets are hard to predict, and analysts usually only recognize the phenomenon after it already happened.
Bull markets usually take place when the economy is strong or strengthening. It tends to happen with a drop in unemployment and a strong gross domestic product (GDP). In a bull market, investor confidence usually goes up and the overall demand for buying stock is positive. Usually, there is also an increase in PIO activity.
What’s a Bear Market?
A bear market is when the stock market sees an extended period of price declines. Like the bull market, the bear market also takes its name from the way a bear attacks, by swinging its paw downward, representing the downward swing that happens of a market in a recession.
Markets that are bearish are usually associated with a drop in prices across the market. However, a bear market could also include commodities and individual securities. Bear markets are typically associated with a price drop of 20% or more from a recent high, as well as widespread negativity from investors. That said, 20% is just an arbitrary number and is just one characteristic of a bear market. A market that’s bearish could also include one in which investors are risk-averse rather than risk-seeking.
Bear Vs. Bull Market: How Are They Different?
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Now that you have a better understanding of what bearish and bullish markets are, let’s take a look at the main differences:
Gross Domestic Product
Gross domestic product, or GDP, is the total monetary value of all finished goods and services. The simple way to think of the GDP is as a comprehensive scorecard of our country’s economic health. If the GDP is going up, it indicates a strong, growing economy where consumers are spending money. With a rising GDP, you can usually expect a bull market.
On the other hand, if the GDP is dropping, you can expect a bearish market. A dropping GDP usually leads to a drop in consumer purchasing, which ultimately leads to a drop in the market.
Stock prices are another major differentiator between bearish and bullish markets. If prices in the market are going up, it indicates that investors are confident and that the market is growing. This is often a strong indicator that the market is heading into a bullish period.
If stock prices start to drop fast, then it can be a good indicator that a bear market is headed our way. Unfortunately, when fewer people are willing to invest in stocks, the bear market usually lasts for a while.
Our economy is built on jobs. Naturally then, unemployment rates are going to be closely tied to the performance of the stock market. If unemployment rates are low, that means people are working jobs, earning money, and spending money. That means when employment rates are high, you can expect a bull market. Likewise, if unemployment rates suddenly start to rise and there is an increase in layoffs because the economy is struggling, you can expect a bear market and one that may be hard to get out of.
Types of Investment Strategies
When the market is bullish, investors tend to focus on a long-term strategy where they expect stocks will increase in price over a period of time. Many investors buy with the intention of holding onto those investments for a long time.
Traders who are investing in a bear market usually focus on a short-term strategy. They may sell shares quickly as the market begins to drop and use it as a chance to get in on those same stocks at a lower price. While this seems like a great idea, it’s risky, as most people aren’t good at predicting when to get out and when to get back in.
Understanding Market Changes
Let’s be clear: not all price fluctuations mean that you’re in a bear or bull market. You have to look at how the market is performing over a long period of time in order to determine whether you are in a bear or bull market. Spikes or small movements represent market corrections or short-term trends. The market could also become stagnant as it tries to decide on a direction. You could potentially see a series of downward or upward movements, which can ultimately cancel out any losses or gains and result in a market that’s actually flat.
Bull vs. Bear Market: Which Should You Invest In?
While it can be scary to think about trading in a bearish market, the reality is that you should consider investing in both. Chances are that you’re going to run into a number of bear and bull markets during your investment career.
During a bullish market, you should take advantage of the rising market prices by buying stocks as early as possible in the upward trend, then sell them when you think they’ve reached their peak. The great thing about a bull market is that any losses you experience are usually temporary and minor. Most investors can usually invest with confidence, knowing there is a high probability of strong returns.
If you’re investing in a bearish market, the chances of seeing losses are higher because the prices are continually dropping. You never know how far they’re going to drop or when the end is in sight. Investors often buy a stock, thinking they’ll grab it at a low price and then see strong returns when the prices turn around. However, there’s a strong likelihood that you’ll take a loss on your investment before the prices do start to go up again.
Investors often see the greatest benefit in taking a short position in a bearish market and actually earning income on the falling prices. They often do this by buying put options, buying inverse ETFs, or short selling.
The best approach is to have a solid investing strategy in place and stick with it. Learning different types of strategies can help you determine which you’re most comfortable with and which are best for different types of market conditions.