Bull Markets and Bear Markets
No one really knows the exact origin of the terms "bull" and "bear" to describe the stock market, but their meaning is clear. The most important thing to know about these terms is that they describe long-term trends, not short-term changes. Bull and bear markets are usually measured in years.
A bull market is a rising market. In a bull market, investors are positive. The economy tends to be strong. Unemployment is low. Consumers are spending money, which increases business profits. When businesses profit, investors demand to share a piece of the pie -- they buy stocks and hang on tight to watch the money roll in. The supply of shares, then, is low -- no one wants to give up their piece of the widget pie. The competition to acquire those much-coveted shares becomes fierce, which drives the prices up even higher. Investors take risks because they feel good about their chances of making the big bucks.
A bear market is a declining market. It tends to begin with a sharp drop in stock prices across the board. There is usually an eye in the storm, during which stock prices increase. But the storm returns, of course, and the bear market falls and falls and falls. History has shown that a bear market tends to level out at 40 percent lower than when it began. Particularly bloodthirsty bears, like the one that ravaged the U.S. during the Great Depression, might level out at about 90 percent lower [source: Incademy].
In a bear market, the economy tends to be weak. Unemployment increases. Consumers spend less, which results in lower business profits. As we've seen, this devalues a given company's stock. Investors tend to sell their stocks before the value decreases too much. Investors don't want to take risks because they don't feel good about their chances.
Investment Strategies -- How to Ride the Bull and Tame the Bear
The best strategy to make money in a bull market is to recognize the trend early and make smart buys. Buy low -- sell high.
It may seem counterintuitive that you can make money during a bear market. Here are a few ways you can tame the bear:
- Short sell: A short sell is a trade that consists of borrowing stock you don't own, selling it, waiting for the price to fall, then buying it back at a lower price, thus obtaining a profit.
- Invest in U.S. Treasury bonds: Bond interest rates tend to rise during bear markets, which makes for an attractive opportunity during a time of uncertainty
- Buy defensive stocks: This is a low-risk way for investors to keep their money in the stock market. A defensive stock is so named because its value doesn't fluctuate much. Utility stocks (energy, water, etc.) are popular defensive stocks.
The Long Run
History has shown that the stock market always rises over the long term. Bear markets and crashes happen, but the market always makes a comeback and eventually rises higher than it ever was before.
Many professional investors say that determining your investments solely on the basis of whether the market is bullish or bearish is unwise. It is better to base investments on research into strong, competent businesses with plenty of growth potential. Over time, educated and informed investments tend to profit more than investments based on rumor, fear, guesswork and superstition.
To learn more about how stock market trends work, you can follow the links on the next page.