Trading 101: Bull and Bear Markets

The terms “bull” and “bear” are commonly thrown around in the investing world to describe market conditions. But how should this affect how you trade? 

These terms describe how the stock markets are doing – whether they are increasing or decreasing. It is always a great idea to see what the general markets are doing as this will impact your portfolio and give you insight on the best strategy to use. Read on to understand more about how these conditions affect how you trade. 

Bull v Bear

A bull market is a market that is rising, usually during a time of economic stability. Whereas, a bear market describes a market that is falling, that occurs when an economy is receding. 

A bull market describes a sustained increase in prices. This reflects on how investors feel the markets are going, during a bull market investors are positive the uptrend will continue long term. A bull market arises when a country’s economy is strong and there are low levels of unemployment. These conditions set a spending consensus as people are in a good economic position, in turn increasing consumer spending and pushing prices higher. 

During a bull market there is a lot of buying pressure creating a strong demand for stocks. This pushes share prices up as investors compete for the low supply of available equity. 

On the other hand, a bear market describes one that is in decline. There is also a metric to help define a true bear market. When a market has fallen over 20% from recent highs it can be described as a true bear market. Overall in a bear market, share prices fall. The economy is commonly slow or in a period of recession when a bear market occurs and is usually accompanied by high unemployment rates as companies struggle to support their workforce. People here have less disposable income and tend to be more cautious with how they use their money. Spending less reduces demand and decreases prices on stock markets. 

During a bear market there is a greater selling pressure meaning more people are selling than buying. The low demand and high supply means share prices drop. As markets fall many investors close their positions and withdraw their money as it is hard to tell where the market bottom will be. When this happens there is a high selling pressure making market prices fall even lower. This downward spiral continues until the market hits a bottom.

What does this mean for investors?

Investing in the stock market should overall post positive returns over long-term periods. This makes investing in a bear market (one that is declining) more dangerous as most stocks lose value and prices can fluctuate a lot over a small period of time. Bear markets are therefore less common and often don’t last very long. 

Bear markets over time from Investopedia

Investor sentiment will affect if a market rises or falls. In a bull market, investors are more optimistic and are looking to buy stocks in the hope to obtain profit. Whereas, during a bear market the market sentiment is negative as investors become standoffish as prices fall. This keeps money safely in bank accounts rather than invested in equity, causing the price decline to continue. 

How markets change

Certain events can give a small change in markets but it is the longer term trend that determines whether a market is bull or bear. Sometimes a market can be stagnant as it doesn’t go in either direction. Small increases and decreases would cancel out any overarching trend making an overall flat market. 

How do I take advantage of these markets?

In a bull market you can take advantage of the positive market by buying stocks before most investors catch on. Buying low and selling high will get you a tidy profit. Overall the market prices should rise so it is key to ride out any small bumps along the way. 

Whereas, in a bear market prices are consistently falling over an extended period of time.  This increases the chances of losses as even if you invest in the hopes the trend will turn, it is difficult to judge where the true bottom will be. In this situation short selling can be the best way to gain profits as you are only betting markets will fall in the short-term. 

Understanding market conditions will help you become a better trader. Using different strategies in bull or bear markets will maximise profit and protect against poor moves. If you want to understand more about market moves, download BullBear

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