Investment Tips: Bull Market Vs. Bear Market

What are bull and bear markets? Read on to get investment tips for either market.

A bull market is one in which prices of a certain group of securities are rising or are expected to rise. It is a prolonged period where the investment prices rise faster than their historical average. In such times, investors have faith that the market will continue to rise in the long term. Bull markets can happen as a result of economic recovery, an economic boom, or investor psychology.

A bear market is an opposite of bull market; it is characterized by falling prices and an expectation that they will continue falling. When the market is bearish, it leads to a slow down of economy together with a rise in unemployment and inflation. In both the cases, people invest. Those who invest in a rising market and think that it will continue to be so are called bullish investors while those who trade in falling markets and think that it will continue to be so are known as bearish players.

Though bull and bear market conditions are driven by the direction of stock prices, there are some other associated characteristics of these markets. However, one should remember that the characteristics described in the following paragraphs are not the fixed rules for typifying either bull or bear market and give just a general idea to identify the market. In a bull market there is a low supply of securities and a high demand for the same. This is because few are willing to sell due to the rising trend of the market, expecting it to grow further. As a result, share prices soar high, as investors compete to buy the available equity. In contrast a bear market has more sellers and lesser number of buyers. Bull and bear markets are very much impacted by the investor's psychology. It is the tendency of the investor to buy when the market has a rising trend, hoping to get more profit out of it. This leads to high prices and continuation of the trend. When the market has falling prices, it shakes the investor's confidence and he begins to move his money out of equities and starts selling out. This leads to further falling of prices. As for the economy, stock market and the economy are strongly connected. The businesses whose stocks are trading on the exchanges are the participants of the greater economy. A bear market is associated with a weak economy as most businesses are unable to record huge profits, because consumers are not spending nearly enough-this decline in profits, of course, directly affects the way the market evaluates stocks. In a bull market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy. To qualify as a bull or bear market it is supposed to be moving in its direction for a sustained period. Small, short term movements do not qualify. Bull and bear markets signify long movements of significant proportion.

There are several well known bull and bear markets in American history. The longest duration bull market was the one which began in 1991 and ended in 2000. The best known bear market was of course the Great Depression. The Dow Jones Industrial average lost roughly 90 percent of its value during the first three years of this period.

There are no set rules for investing in the bull or the bear markets, however in a bull market the best thing to do is to take advantage of the rising prices and buy securities early, watch as the prices rise and when they reach their peak sell it .Though its not possible to predict with certainty when the prices will reach their peak or bottom, investors are more likely to make profits in a bull market. This is because on the whole investors have a tendency to believe that the market will rise. As prices are on rise, any losses should be minor and temporary. Portfolios with larger percentage of stock can work well when the market is on rise.

Bear markets are complete opposite of the bull markets. The chances of losses are greater here as prices are continuously falling and the end is not in sight. Investing in bear markets can involve many different strategies. This includes, investing in less volatile securities such as fixed-income bonds or money market securities. Another strategy investors employ is to wait for the downward prices to reverse themselves. Some investors also turn to "defensive stocks" whose performances are only minimally affected by changing trends in the market. The food industry, utilities, debt collection and telecommunications are popular defensive stocks. However, here also there is no guarantee that the defensive stocks will perform well during any market period. Bear markets also characterized by short selling. Short selling occurs when the investor believes that prices of the stocks are going to decline, or he believes the stocks are overvalued or because there is some fundamental problem with the company.

To conclude, there is no sure method to predict bull or bear markets. Investing in both involves risks, and so investors should invest their money based on the quality of their investments. At the same time it is important to have an understanding of the markets and educating yourself to the trends. Since both the bull and bear markets will have a large influence over the investments. There are many investment methods which the investment professionals take advantage of, such as dollar cost averaging, selling short and diversification. Understanding these well founded strategies will surely improve the chances to perform better in both the markets.

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