When investing in the stock market for the first time, you'll more than likely hear of two types of market - bear and bull. A bear market is one that is typically heading downwards, with negative activity and poor forecasting. The contrasting bull market is one that is heading upwards, with positive forecasts likely. The natural reaction to have with a negative bear market is not to invest, while in a bull market the reaction would be to follow the crowd and pour your money in. However, this mentality is paradoxically illogical, and this article will explain why.
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One of the most spectacular bull market booms and busts in history was the growing Dotcom Bubble during the late nineties, followed by its spectacular crash from March 2000 to October 2002, in which some $5 trillion was removed from the value of technology stocks and shares. What ostensibly happened in this instance was an overwhelming speculative sentiment about the potential of the Internet, with hundreds of companies sprouting up with similar business plans and securing investment. Venture capitalists saw the rise of these shares, and were keen to get in on the action quickly, bypassing normal constraints and caution, while also increasing the value of stocks even further. As more and more people jumped on the technology bandwagon, the prices skyrocketed until eventually the bubble burst, destroying the value of many people's investments.
The Dotcom Bubble is a classic example of when bull market sentiment gets completely carried away. Prices rose, more and more people jumped on the bandwagon, which sent prices higher, and then prices collapsed. When times start getting good, and you see other people making a bull market fortune, it's easy to be seduced by soaring prices. However, just imagine you invested in the NASDAQ around its March 2000 peak of 5000 points. Within nearly two weeks you would have stood to lose 9% of your investment, while within a year you would have seen it lose its value by some 50%.
The thing to learn about bull markets is that it's difficult to know when it will run out of steam. The key is not to go with the flow of the market and invest during times of rising prices. If you were to buy on a rise, then sell when the market begins to fall, you would be following the illogical investment policy of buy high, sell low, which puts you in stead to lose money. Instead of this strategy, watching intently on booming markets and waiting for the moment they run out of steam and begin to fall is a better strategy. When stocks become overpriced, as tech stocks did in the Dotcom Bubble, they will inevitably burst, but buying in the aftermath of a collapse could lead to securing a bargain. Buying during 'bear market' periods is therefore a more likely way of finding a buy low sell high strategy.
If you're looking to invest, the current bear market in stocks indicates a good time to buy. Warren Buffet, the world's richest man largely due to his investment strategy, has said there's never been a better time to buy US stocks, while in the UK, the FTSE 100 is only worth 60% of what it was this time last year. If you're looking to find out more on investments, then take a look at Legal and General.
Stock market trends are generally described using one of two colloquial terms: the Bull Market and the Bear Market. The market shifts back and forth between these two market conditions.
A bear market is a phrase that represents the general downturn of the market, or lowering stock prices. On the other hand, the bull market is just the opposite - the positive growth of the market's stock prices.
Individual stocks with increasing value are known as bullish stocks, while those experiencing a decrease are called bearish stocks.
Indicators of Bear and Bull Stocks
You cannot accurately classify the stock market trend simply on the basis of short-term data. Determinations of bull or bear markets rely on the overall trend of stock prices over months of time.
For example, there will inevitably be temporary ups in a bear market and temporary downs in a bull market. So the stock market fluctuates daily, but it is more important to assess its longer-term overall trend.
Economic Indicators of the Market
The stock market tends to mirror the overall state of the economy, having a number of similarities with the overall economy.
A bull or bullish economy tends to have moderate interest rates and a low unemployment rate. Confidence in the stock market is high, and the performance of stocks on average either lean toward or are strongly positive.
In times where the economy is undergoing an economic depression, we see high rates of unemployment and a number of poor economic indicators. In such an economy, investors tend to lose confidence in the market, and may sell their stocks in large amounts.
Extreme bear or bull markets are not good for the stock market, with either extreme generating its own set of concerns. A high bear market can exacerbate economic problems as investors rush to dump their stocks quickly to minimize their losses.
Strong bull markets lead to a "bubble" of stock wealth built due to over-confidence of investors. Eventually this bubble bursts, causing major problems to the performance of stocks. When such bubbles burst, companies die.
The Bull Market
Bull markets draw investors who to want to purchase stocks. The performance of the economy and the stock market tends to be shifting positively, making it a good time to invest for most investors - if they invest early enough.
Investors tend to have more money during the economic conditions of a bull market. However, the increased demand and shortage of supply for stocks can cause the stock prices to become inflated, or over-valued.
It can be easier to earn a profit in a bull market because the trend of the economy is shifting upward and everyone knows. But eventually the economy and the stock market experience another downturn in its cycle of ups and downs.
For investors, the profitability key comes in accurately determining the transition point where the market begins to fall and then take at least some of your profits by selling a portion of your stocks before being negatively impacted by the downturn.
The Bear Market
The bear market can be extremely difficult to navigate, especially for a novice investor. Investors here use a number of special investment strategies to try to make the best of a bad situation.
One of these techniques is called "short selling," which is the selling of stocks as you anticipate its price will continue to decline. Then the investor can buy the stocks back for an even lower price.
Other investors decide to focus only on investing in more stable stocks such as government owned utility companies because they are less risky.