As an investor, you need to be keen on the stock market’s prevailing trends. This information will make you know when to buy stocks in the market or sell them, ensuring you get the returns. Therefore, looking at how the market performs over time will help you make the best investment decisions. Moreover, the market fluctuations can have either a positive or negative influence on your investment. The market fluctuations bring about bear and bull markets for investors. What are they? What are each’s characteristics, and how can an investor survive them. Keep on reading to find out more as we delve into these types of markets.
A bull and a bear
In the stock market, a bull is anyone who buys securities in expectation of a rise in shares’ price. On the other hand, a bear in the financial market refers to an investor with a pessimistic view of a market where stock prices reduce for a prolonged period.
What is a bull position and a bear position?
A bull position (long position) is where an investor gets lots of profits due to a rise in investments’ price. An increase in price leads to the investor’s profitability, hence increasing the bull position’s value. Therefore, when an investor buys a security in anticipation of a price rise, he or she is in a bull position. However, a bear position (short position) is when there is an expectation of a decrease in value, or the price of financial security will decrease. If the prices fall in a bear position, an investor will profit.
What is the bull market?
A bull market is a financial market condition where stock prices rise, or the market expects them to grow, and the economy’s condition is favorable. The prices may increase consistently for months or years. A perfect tool to comprehend these moves of the different stocks is FINVIZ. Moreover, in such a time, the level of employment is high. Additionally, most investors are bullish, and since there is a price increase, they believe the overall increase in prices will continue for a long time. However, the bull market prices can rise so high than the securities’ actual value.
Characteristics of a bull market
The following are characteristics of a bull market.
- There is usually a high demand for securities with a low supply. Few investors are willing to sell in this period than those who want to buy securities.
- There are minor and temporary losses.
- The majority of people have lots of money and are willing to spend it.
- The investors are optimistic and confident.
What causes a bull market?
When the demand for security or securities outweigh the law of demand and supply, you experience a bull market, thereby raising the prices further. Moreover, in a bull market, at least 80% of all the stock prices rise for a prolonged period.
How to survive a bull market
If you want to survive a bull market and thrive in it, you can do the following as an investor.
- You can buy stocks as early as possible and sell them when the prices are at the peak.
- You can also invest in more equity to increase your chances of making returns on your investments.
- You can research every available investment opportunity.
- Get more knowledge and tips on how to increase your profits in the market.
What is a bear market?
A bear market is where the stock market experiences a decline in prices for a prolonged period. During this period, the stocks decrease in value—the bear market results in negative investor sentiments. Furthermore, the economy recedes, and many people sell their shares. This circumstance leads to a fall in share prices to encourage selling. Additionally, stock prices decline by more than 20%. Therefore, it’s indispensable to read the daily news and track the real-world economy. You can this on Yahoo Finance, Financial Times, or any other financial newspaper. A bear market can last for weeks or several years. When a bear market lasts for 10 to 20 years, it is a secular bear market. On the other hand, one which lasts for weeks or several months is a cyclical bear market. Importantly, it takes time for investors who incur losses in a bear market to recover.
Characteristics of a bear market
The following are some of the characteristics of a bear market.
- The investors become pessimistic. They stop buying more investments and sell the current ones, leading to increased shares, hence a price decrease.
- The value of stocks falls. What leads to the result that the listed companies have lower stock prices.
- Negative investor sentiments
- Less money for companies
- The low demand for securities creates a high supply of the same.
- A weak economy. As consumers don’t spend a lot of money, they reduce businesses’ profits.
What causes a bear market
A slowing economy with low employment rates, a drop in business profits, and weak productivity causes a bear market. It occurs when there is at least a 20% decline in price from the previous year’s most significant high. Additionally, when the market index falls 20% or more over two months, a bear market occurs.
How to survive a bear market
Many average investors lose in bear markets. However, one who wants to survive and thrive in a bear market can put the following strategies in place.
- You can research assets that increase in price to see the sectors and investments that went up.
- You can turn to defensive stock such as food and personal care stocks.
- You can start short selling.
- Don’t be hasty to move in the market as it could be risky since the security prices may decrease abruptly.
- You can buy typically profitable dividend stocks.
The Bottom Line
There is an evident uncertainty in the stock market as it keeps fluctuating. However, the next time there is a crash, you need to be ready for it as an investor. You do not want to miss out on your returns. Therefore, you need to do your research well, avoid panicking, and get the necessary knowledge required to survive, thrive, and succeed in either a bull market or a bear market. Importantly, look at the market trends and gauge their influence on your investment.
