The movement of the stock market, its trends, whether up or down, are referred to as the “emotion” of the market. There are specific terms that are used to indicate market movement. A bear market is characterized by the downward movement of the market over a period of time while a bull market is characterized by a consistent upward trend. Likewise, a stock that is doing well is considered bullish while a stock with declining value is referred to as bearish.
Bull and bear references as applied to the stock market in regards to its general conditions or “emotion” are not used to indicate short term fluctuations within the market. A bear market is generally a market where the prices of key stocks have fallen in price by 20% or more over a minimum period of two months. It should be noted, however, that a bear market may see a temporary increase in stock prices though they can not be sustained until the tide changes. On the flipside, a bull market is indicated by the consistent and long term rise of key stock prices.
Historically, the stock market has reflected the state of the nation’s economy. Bull markets have often thrived when the economy was doing well, unemployment was low and interest rates were reasonable. Bear markets, on the other hand have usually occurred during times of the economic downswing or slowdown. In such cases it is not uncommon for investors to lose confidence in the market and companies embark on layoffs an budget cuts. In extreme cases a bear market can escalate an already declining investor confidence due to lowered values of stocks which can lead to a panic driven stock market crash. Likewise, a bull market that is exaggerated can be driven by over enthusiastic investors and a market “bubble” occurs. This “bubble” will eventually burst and values will decline, often sharply.
While most gains are made during bull markets, opportunities for gains are present during bear markets. Having an understanding of the characteristics of each type of market will allow investors to incur gains and profit from the trends. Naturally, when the market is bullish investors are more inclined to buy up stocks. The environment is favorable with an economy that is doing well and people may have some extra money that they would like to use to “dabble” in the stock market. Under these conditions, the supply is cut but the demand is high and this serves to drive prices higher.
A bear market, on the other hand, presents falling stock prices leading investors to seek to unload their stocks in an effort to salvage what they can from their losses. Often, investors in a bearish market will place their money in fixed return instruments such as bonds or mutual funds because they pose less of a risk. As money is withdrawn from the stock market due to stock sales, the supply exceeds the demand and the prices of the stocks are driven down.
Of course, the easiest time to make money in the stock market is when it is bullish. If you can get in at the onset of the upward trend, you can stand to benefit the most by incurring the greatest gains. The dips that occur during a bull market are temporary and are usually corrected rather quickly. However, it is important to understand that the rising prices will eventually begin to decline and the wise investor will learn how to “read” the trends and anticipate the market peaks, thus the optimal time to sell before the market turns bearish.
Bear markets do have some great benefits though because they offer investors the opportunity to buy into stocks at bargain prices. Unlike the bull market where the key to optimum gains is to enter at the beginning, the greatest chance for profit in a bearish market is at the end of the trend. Typically, the prices drop, often substantially, before recovering which presents the investor with a optimal buy in at a low price. However, investors should be prepared to take a short term loss as prices dip just before the upward turn.