If you spend any time monitoring the markets either online or on television, you have heard the terms “bull market” and “bear market” used to describe the current market conditions. If you are a veteran of the investing world, then it is likely you understand the meaning of these terms. However, if you are new to investing, you are likely to find these terms to be foreign to you. Additionally, if you are a business owner or entrepreneur looking to take your business public in search of additional funding, it is vital to understand what these two markets may mean for your business profitability. Since the direction of the market is a major driving force that affects the strength of your portfolio, you need to know precisely what the terms mean and how each will affect the standing of your investments in the market.
What are Bear and Bull Markets
The terms bull market and bear market are used to describe how the stock markets are doing in general. This means there is a different term used depending on whether the market is appreciating or depreciating in value. There is also the current attitude of investors to consider when discussing how the markets are trending. Investors’ attitudes heavily influence the positive or negative direction of the market, so their terms, bull, and bear, also help to denote how investors feel about the market and current investment trends.
In short, a bull market is a market that is on the rise. During a bull market, the economy is strong. These markets are typically indicated by a sustained increase in the price, for example, in equity markets in the prices of companies’ shares. During these times, investors often have faith that the current uphill trend will continue over the long term. During the bull market, it is common to see a well-functioning, stable economy and high employment levels.
In direct contrast, a bear market is a market that is usually in decline. Generally, bear markets are indicative of a market that has fallen twenty percent or more from recent highs. In a bear market, share prices are continually dropping, which results in a downward trend that investors believe will continue. This results in a perpetual downward spiral of the market as investors will often withdraw their money from a bear market and sit on the cash until the trend reverses. The action of removing funds from the market results in a further reduction in trade prices.
During a bear market, the economy will typically slow down, and unemployment rates will rise as companies begin to lay off workers. A bear market can be more dangerous to invest in as many equities will lose value, and prices will become volatile.
Characteristics of Bull and Bear Markets
Although the direction of the stock prices generally marks a bull or bear market condition, there are some other accompanying characteristics or indicators that investors should be aware of. Below is a list that describes some of these factors.
Supply and Demand for Securities
During a bull market, a strong demand for securities is often present. However, accompanying this strong demand is a weak supply. As a result, many investors want to buy securities; however, there are very few who are willing to sell. Because of this, share prices will rise as investors compete to obtain available equity.
In a bear, market the opposite is true as more investors are looking to sell as opposed to buy. The demand for securities is significantly lower than supply, and as a result, share prices drop.
Change in Economic Activity
The stock market and the economy are strongly linked. This is because the businesses whose stocks are trading on the exchanges are participants in the economy through their day to day business dealings.
A bear market is associated with a weak economy as most of these participant businesses are unable to record substantial profits as consumers are not spending enough. This decline in profits directly affects the way the market values stocks.
In a bull market, the reverse is true as people have more money to spend and are willing to spend it. As a result, the economy is more robust.
Thought Patterns of Investors
Because the behavior of the market is impacted and determined by how investors perceive that behavior, investor psychology, or the thought patterns of investors affect whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, investors are more likely to willingly participate in investing options in the hopes of obtaining a profit.
During a bear market, sentiment about the direction of the market is negative as investors are moving their money out of equities. They will either invest in fixed-income securities or sit on their cash until the market improves. The resulting decline in stock market prices shakes investor confidence, which further causes investors to keep their money out of the market.
Gauging Changes in the Market
Correctly timing the market is virtually impossible.
The critical determining factor of whether the market is a bull market or a bear market is not just the market’s reaction to a particular event but how the market is performing over the long term. Small movements only represent a short-term trend or a market correction. You must monitor changes over a more extended period to determine whether you see indicators of a bull or a bear market.
What to Do in Each Market
In a bull market, the ideal thing for an investor to do is to take advantage of rising prices by buying stocks early in the trend, if at all possible, and then selling when the prices of the stocks have reached their peak. The earlier in the trend you can buy, the more you will see in return on your investment when you sell. During a bull market, any losses you experience should be minor and temporary. As a general rule, an investor in a bull market can actively and confidently invest more equity with a higher probability of more substantial returns.
During a bear market, the chances of loss are higher because stock prices are continually losing value. If you decide to invest during a bear market in hopes of an upturn in the market, you are likely to take a loss before any such reversal of the market occurs. During a bear market, an investor may be wise to invest in defensive stocks. These include industries such as utilities, which are often owned by the government and are necessities that people have to spend money on regardless of the condition of the economy. These stocks are only minimally affected by changing trends in the market and therefore are safe irrespective of market trajectory.
Both bear and bull markets will have a considerable influence on your investments and the spending patterns of consumers. If you are looking to become involved in the market as a buyer or seller of stock or securities, it is a good idea to take the time to determine what the market is doing and how the direction of the market may impact your investments. If you are looking to raise capital for your business or invest in another company, it is also essential to understand how the current market may impact your return on investment.
If you are in need of guidance when it comes to investing either as a buyer or a seller, look to Venture North Group. Our combined years of expertise in investing and business funding can help guide you in the best direction for your business needs.