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A bull market is one in which prices of an assured group of securities are rising or are expected to rise. It is a stretched period where the investment prices rise more rapidly than their historical average. In such period, investors have faith that the market will continue to rise in the long term. Bull markets can happen as a consequence of economic recovery, an economic boom, or investor psychology.
A bear market is a contradictory of bull market; it is characterized by falling prices and an expectation that they will prolong falling. When the market is bearish, it leads to a slow down of economy jointly with a rise in unemployment and inflation. In both the cases, people try to invest. Those who will 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 several other associated characteristics of these markets. Still, one should remember that the characteristics described in the following paragraphs are not the permanent rules for typifying either bull or bear market but tried to give just a broad idea to identify the market.
In a bull market there is an almost low supply of securities and a high demand for the securities. This situation arises because few are willing to sell due to the rising trend of the market, expecting it to grow further. As a result of this, share prices soar high, as investors compete to buy the available equity. In contrast to this a bear market has more sellers and lesser number of buyers. Bull and bear markets are impacted by the investor’s psychology. It is the tendency of the investor to buy when the market has a rising trend, eager to get more profit out of it. This leads to high prices and prolongation of the trend. So also when the market has falling prices, it shakes the investor’s confidence and she or he begins to move his money out of equities and starts selling out. This leads to further more drop of prices.
As far as the economy is concerned, stock market and the economy are strongly associated. The businesses whose stocks are trading on the exchanges are the participants of the superior economy. A bear market is connected with a weak economy as most businesses are unable to record huge profits, for the reason that consumers are not spending nearly enough-this decline in profits, of course, directly affects the technique the market evaluates stocks. In a bull market, the reverse occurs as people have lost of money to spend and are willing to spend it, which, in turn, drives and strengthens the economy. To meet the requirements 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 be eligible. Bull and bear markets suggest long movements of significant proportion.
There are quite a lot of well known bull and bear markets in American history. The longest duration ever seen in the bull market was the one which began in 1991 and ended in 2000. The best known bear market till now was of course the Great Depression. The Dow Jones Industrial average lost approximately 90 % of its value during the first 3 years of this period. There are no typical set rules for investing in the bull or the bear markets, nonetheless 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 .Despite the fact that 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 of the fact that, on the whole investors have a tendency to believe that the market will rise. As prices are rising, any losses should be minor and temporary. Portfolios with larger percentage of stock can work healthy when the market is on rise.
Bear markets are complete contradictory of the bull markets. The chances of losses are greater in bear market as prices are continuously falling and the end is not in sight. Investing patterns in bear markets can involve many different strategies. This kind of strategies includes, investing in less unpredictable securities such as fixed-income bonds or money market securities. Another way of strategy includes investors employ is to wait for the downward prices to reverse themselves. Some investors also turn to invest in the “defensive stocks” whose performances are only minimally affected by changing trends in the market. The food industry, utilities, debt collection and telecommunications are some of the popular defensive stocks. Nevertheless, here also there is no guarantee that the defensive stocks will perform sound during any market period. Bear markets is also characterized by short selling of securities. Short selling takes place when the investor believes that prices of the stocks are going to decline, or she or he believes the stocks are overvalued or because there is some elemental problem with the company.
To summarize about the bull and bear market, there is no certain method to predict bull or bear markets. Investing in both involves risks, and so investors only one option left with the investor is that they should invest their money based on the quality of their investments. At the same time it is very much important to have a correct understanding of the markets trends and educating or updating yourself to the emerging trends. Seeing as both the bull and bear markets will have a great influence over the investments.
There are many investment methods or techniques which the investment professionals always take advantage of, such as dollar cost averaging, short selling and diversification. Understanding these fine founded strategies or techniques will surely improve the chances to perform better in both kinds of markets.