If you are keen follower of what goes on in the investment market or you’re an investor yourself, you must have heard of the terms ‘bear’ and ‘bull’ market. Many of us have come across these terms either through the internet or on business platforms discussing financial markets. Understanding the difference between a bear and bull market is the best way to know what these terminologies mean.
A bear market refers to a period within which a market is on a decline and this term is often commonly associated with the stock market. When stocks experience a steady decline over an extended period of time, the market can be described as bearish. This can happen over a period of months or even longer. How does one identify a bear market? Checking how an index is performing is one effective way of knowing whether the market is on a decline or not. For instance, S&P 500 and DJIA can be used to check for declining markets. When the S&P 500 has been lower than 15% for an entire past year, the market can be described as a bear market.
On the other hand, a bull market is the opposite of a bear market. In this case, a market can be described as a bull market when stock market prices experience a steady increase which is higher than the normal average. Just like in a bear market, indexes are used identify a bull market. For instance, if the average return on an index is usually 12% but for some reason it stays at 16% or above for some time, this is considered to be a bull market.
So, what causes a bull or bear market? It is worth mentioning that these markets fluctuate depending on the economic performance. If the economy is not performing well or there is a financial recession, the markets exhibit bearish characteristics and go down as a result of the bad economic times. If the economic times are bright and the market is doing well, the resultant effect is a bull market.
Some people see a bull market and get tempted to invest at that point. This is not a wise strategy because in some cases, some stock prices are usually at their peak and many people don’t realize it. When you buy a lot of stocks when the prices have shot up, there is a risk of the price beginning to drop especially if you purchased them when they were at the peak price. Alternatively, the prices may fail to go up and therefore, you might not make any profits from the investment. The same concept applies for the bear market. You may decide to invest because stock prices are at the lowest and therefore, you expect them to begin increasing. However, there is a chance that they could keep going lower.
The ideal time to invest in the stock market is when the economy is performing well and out of recession. It is usually at this point when the markets begin to appreciate and it’s difficult to predict what will happen in the near future. For investors looking to keep their risks low, it is important to ensure consistent investment and focus more on investing in a bull market and pay less attention to investing in a bear market because of the high uncertainty associated with it.
