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Introduction to Bull and Bear Markets

UTC by John Caroline · 6 min read
Introduction to Bull and Bear Markets
Photo: Depositphotos

A market is either regarded as being bearish or bullish, depending on the situation of the market at a particular time. Here is a guide to understanding the bull and bear markets.

Every form of market where assets are traded often experiences unstable market conditions. The performance of a market at any given time is always dependent on the kind of factors surrounding the market at that time and their impact on it. These factors can either cause a market to experience a period of substantial growth or can as well be the reverse. History has never had a record of only a favorable market, it has always been volatile. The two possible conditions a market experiences are termed bull and bear markets. It all depends on the performance of the market at the time.

Experiencing both the bull and bear markets is unavoidable. Thus, it is important for investors to understand and be able to track these situations in order to make good investment decisions. The bull market signifies a period of growth where prices of assets are on the rise. Meanwhile, the bear market explains the reverse.

Understanding Bull Market

The bull market describes a favorable market condition when the price of an asset or a stock increases over an extended period of time.

Investors with high optimism and confidence over the assets are regarded as “bulls”. Their faith and confidence in the performance of the assets drive them into acquiring as much as they can afford. In turn, it leads to an upward trend and surge in the price of the assets. Most times, this drags the consciousness of other people on the asset, hence causing a wider and massive increase in the demand for the asset. This is a major drive force to a bull run.

A major reason behind the start of a bull market is the confidence of investors. As said earlier, at some point when investors begin to predict a positive potential for an asset, they tend to start demanding the assets while believing that it would rise in price. Their belief and actions always influence the assets and the assets would indeed start experiencing a surge in price.

It may appear difficult to identify a bull market since market conditions and prices of stocks and assets are always fluctuating. A notable feature that signifies that the market has turned bullish is when prices have risen by 20% for an extended period of time before the market starts experiencing another 20% decline in price.

More so, a general increase in the amount of IPO activity is another key feature that denotes the era of a bull market.

Several examples of a bull market have happened in the history of the stock market. A very notable one lasted for about 11 years, from 2009 to 2020, and was the longest in stock market history. After plunging as a result of the 2008 financial crisis, the S&P 500 index bottomed out in March 2009 and then proceeded to climb until early 2020 when the COVID-19 pandemic started.

How to Take Advantage of a Bull Market

Investors who seek to maximize profits are expected to know how to utilize any market condition to their benefit. Since the bull market is a positive market trend for traders and investors, it is important to understand the strategies needed to take advantage of a bull market before it elapses.

As said earlier, the major factor that fosters the existence of a bull market is the confidence of investors in the price of an asset or stock. Interestingly, this can as well serve as the best means to take advantage of a bull market. In a period like this, investors are advised to buy and hold more assets and sell after a short period when there is a further increase in the price.

Another similar approach to benefitting from a bull market is an increased buying and holding method. This strategy demands that investors continue to add to their holdings in an asset or security each time it increases in price.

Furthermore, investors can as well take advantage of a bull market when they seize opportunities of slight dips in prices of an asset to acquire more. Since prices still fluctuate even in a bull market, users can track assets when they tend to slightly fall in price. And as it is likely that the price will surge again, investors can make cool profits during this period.

Understanding Bear Market

The bear market is exactly the opposing trend of the bull market. It can be described as a market situation where the interest of investors in an asset or stock reduces significantly with a massive dip in the price of the assets. In other words, it is a period where the value of assets and securities continue to depreciate for a sustained period of time.

During this period, the confidence of investors over certain assets and securities becomes low as the market becomes more filled with investors who predict a continuous fall in the price of the assets. Unlike the bull market, a huge fall in the interest and confidence of an asset or security is a major reason behind the start of a bear market.

A notable feature that makes it easy to recognize a bear market is when the value of the assets declines at 20% or more for an extended period of time. This discourages the belief of investors, and they begin to lose confidence in the potentials of the asset.

The rate of unemployment at this period increases more as a result of negative impacts on the economy that is slowing down.

Moreso, the demand for assets and commodities in a bear market reduces significantly. As such, supply is outweighing demand during the period.

A prime example of a bear market is the 1987 market crash, which saw a 29.6% price dip that lasted for about three months.

The most recommended way to invest in the bear market is to buy and hold as many assets as possible during this period and sell when prices start surging. This has been a method many investors have adopted to make reasonable profits.

Conclusion

Bull and bear markets are inevitable in every investment experience. Either in the short run or in the long run, investors would always experience a bull and bear market situation because both trends always take turns.

Hence it is important for investors to be able to determine the market situation in times of investment decision making. Both bull and bear markets will always have great impacts on investments. Thus, it is crucial to be able to track and manage them in order to maximize profit.

Nonetheless, it is a fact that the stock market always poses positive potentials over the long term. Hence investors can keep holding their assets till the market starts turning positive which would eventually happen.

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FAQ

What is a bull market?

A bull market is a market situation when the price of an asset or a stock increases over an extended period of time with a consistent increase in the confidence of investors over the assets.

How to invest in a bull market?

It is best to invest in a bull market by buying and holding more assets each time there is a slight dip in the value of the assets, this guarantees profit when the value appreciates again. Moreso, buying and holding more assets each time there is a rise in the price of an asset is another way to invest in the bull market, the bull market poses lesser risks to investors.

What is a bear market?

A bear market is a period where the value of assets and securities continue to depreciate for a sustained period of time following reductions in the interest of investors.

What causes a bear market?

When investors begin to predict a fall in the price of an asset, they begin to lose confidence in the assets. This results in a massive decline in the demand for assets and securities, hence leading to a bear market.

How long do bear markets last?

The bear market lasts until there is a 20% or more upward trend in the price of assets of commodities.

How to make a good investment in a bear market?

The best way to make a good investment in a bear market is to buy the dip which implies that investors should acquire as many assets as possible during the bear market and then sell off when prices begin to pop up.

What is a stock market correction?

A stock market correction happens when the stock market declines in price by 10% to 20% after a period of increase.

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