If you follow investing news, you’ll often hear the words “bear” and “bull” used when talking about market conditions. However, while these terms are widely used, people often struggle to understand exactly what they mean. Since they refer to the current trend in the market – and that trend has a direct influence on your investments – you need to know exactly what they indicate, how to recognize them and how they are likely to affect your portfolio.
In simple terms, a bull market is a market where the prices are rising. On the other hand, a bear market is one where the prices are falling. However, it’s not as simple as that. A bull or bear market is as much about investor confidence – or lack of it. If investors believe that the market is likely to continue to rise in the long term – a bull market – then this can be a self-fulfilling prophecy. Money flows into the market to follow the rising trend, which strengthens the trend further. Economic news also has a strong influence – a bull market is likely to continue during good economic times, with strong GDP growth and rising employment. Conversely, if investors lose faith in the market or the economy, they may start to take the money out, prices drop, and a bear market begins.
Long-term, not short-term
Prices rise in a bull market and fall in a bear market, but this doesn’t mean that every price rise or fall signals a bear or bull market. A bull or bear market is a long-term trend, not just a short-term price movement. For instance, if prices fall for several days in a row in a bull market, this may just be a correction – for example, when the market has got ahead of itself and is overbought. The market can also react to specific events – such as one bad economic report – and then resume its upward trend as investors’ fears start to subside. Before you assume that there is a major market reversal, look for substantial evidence – for example, if several key indexes have changed by 15% or more.
How to deal with bull and bear markets
In a bull market, rising prices may provide potential profit opportunities. Some investors decide to buy early in the trend and sell as equity prices approach their peak. However, getting the timing exactly right is impossible, so they may try to increase their position over time and manage their risk. Keep in mind that short-term reversals can still happen in a bull market, so you may need to be prepared for these.
In a bear market, falling equity prices often lead to losses. Under these conditions, it may be prudent to reduce your holdings in the market, and to move your money into other safer investments. There are also some industries which are less affected by bear markets – such as utilities – and these may also be a safe haven. However, keep in mind that no investment is truly safe, and therefore it is always important to be conservative in a bear market.
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