Understanding What Bear and Bull Markets Are

Buying and selling stocks are excellent ways to develop financial security, but it is unfortunately difficult to break into financial markets due to the learning curve associated with them.

If you are new to financial markets, it is common to feel like everyone around you is speaking a different language, leaving you with questions about investing.

The terms “bear market” and “bull market” refer to different types of financial markets. If you are starting to invest on the stock exchange or trade in bonds and commodities, you need to know what the difference is between a bull market and a bear market.

Related Article: Investing on a Budget

By understanding the basics of each market, you’ll be in a better position to know when to buy and when to sell. Even if you are not currently a trader, it is a good idea to learn more about the different markets, since it may help you make broader financial decisions. Some of your retirement savings may be investments, so understanding the different market gives you a better idea of what happens to your money. More information about the differences between bear and bull markets is covered below.

What is a bull market?

In its simplest term, a bull market is a market where prices rise or are expected to rise. In most situations, bull market refers to the stock market, but the phrase can also refer to anything traded, such as commodities, bonds and currencies.

Typically, a bull market occurs when stock prices rise by 20 percent, generally after there has been a drop of 20 percent. Compared to other financial markets, bull markets are harder to predict. Most bull markets are only named as such after transitioning from a previous market type.

Related Article: 5 Best Personal Finance Website of 2019

What are the characteristics of a bull market? Bull markets typically take place at a time when the economy is strengthening or is already strong. A bull market occurs when there is a strong gross domestic product (GDP) and at the same time there is a drop in the number of unemployed residents. Bull markets often coincide with a rise in corporate profits as well. If the demand for stocks is positive and the overall tone of the market is good, these are indicators a bull market is coming. There is also a general increase in initial public offering (IPO) activity, which leads to increased confidence from investors.

During a bull market, demand is strong and supply is relatively weak. Few people are willing to sell at the time of a bull market. Investors are more interested in buying securities. To benefit bull markets, you need to buy early. When you buy early, you can take advantage of the rising prices and then sell when the prices have reached a projected peak. The bottom of the peak is difficult to determine in advance, but any losses tend to be minimal and temporary.

What is a bear market?

A bear market is basically the opposite of a bull market. When investment prices fall over a period of time, this is when a bear market happens. A bear market typically occurs when, after being high for a year, prices drop by 20 percent or more. A bear market has serious consequences. If prices plummet by 10 percent over a day or two, it can cause a stock market crash. You can measure a stock bear market by the Dow Jones Industrial Average, the NASDAQ and the S&P 500. A bear market can also occur with asset classes like commodities and currencies.

How do you recognize a bear market? When the major indices continually get lower over time and then hit new lows, a bear market is happening. The highs of the indices are lower than they were before the change. Recessions sometimes accompany bear markets. A recession is when the economy ceases to grow and then contracts. These are times of high unemployment rates and company layoffs.

The average duration of a bear market is about a year, but 18 months is a more realistic figure to put on the length of a bear market. On average, a bear market occurs every three years. You can also recognize when a bear market is happening if you know what stage the economy is at in the business cycle. It is unlikely for a bear market to occur if the cycle has just entered an expansion phase.

How to Use Bear or Bull Markets When Investing

If you have never invested before, you may be confused by how to use bear and bull markets. If you are getting started with investing, you may instinctively think bull markets are the best, since it means market prices are increasing. However, bull markets are only good if you already have an investment in the market.

When you are starting to invest, you want to look at bear markets. Investing in a bear market is much easier because the product value has significantly decreased, so existing owners want to sell their shares at lower prices to try to recoup their losses. The decreased price allows you to purchase more shares without spending as much money.

Once you have the shares, you wait for the market to recover. This is the riskiest part of investing. If you picked a strong investment, over time the market for your stock will increase and the bear market may gradually turn into a bull market. Once you have stocks in a bull market, you are at the optimal spot to sell your investment. Under normal circumstances, selling your stocks during a bull market is good for your profits, but it becomes significantly better if your original purchase was made for cheap during a bear market.

Unfortunately, not all stocks recover. It is possible for your investment to plummet even when the project bear market period ends. If this happens, you are either forced to sell for less than you paid or hold onto your stocks in the hopes of their prices eventually increasing.

Related Article: How to Save Money During a Recession

It might also interest you: