Bull and bear markets describe periodic market trends. In general, a bull market represents a 20% increase in a market over time from its bottom, while a bear represents a 20% decrease from its top. Put simply:
A bull market is a market on the rise and a bear market is a market in decline.
The terms “bull” and “bear” can also refer to positive or negative sentiments in regards to specific sectors or stocks. For instance, someone may feel “bullish” about a stock if they expect it to increase in value. You will also likely notice investors saying they’re “bearish” on a stock if they think it will fall.
In a bull market, we tend to see strong demand and weak supply for securities. This typically makes share prices rise as investors competefor the available equity. In a bear market, on the other hand, there are more people looking to sell securities than buy them. The demand is usually significantly lower than supply, which makes share prices drop.
What bull and bear markets mean to you as an investor
The stock market is generally bullish in the long-term (the S&P 500 has had an average annual return of 10% before inflation, for example). However, this is no guarantee of future results and the direction of the stock market in the short-term is also a major factor affecting your portfolio, which may determine the most appropriate investment strategy for you at any given time.
In the context of a bear market, investors may decide to further diversify their portfolios or even withdraw their money and sit on cash until the downward trend reverses. Timing the market is also very hard, so some investors may choose to consistently purchase shares when they are at their lows to reduce the average cost of their investment (this tends to increase the investor’s returns if the stock’s price rises. However, the stock price may not rise at all, so keep in mind that averaging down isn’t always an appropriate strategy and may not fit your investment objectives).
In a bull market scenario, on the other hand, investors are typically less risk averse and tend to be more confident when making concentrated bets. It may be a good idea to take measures to potentially protect against market movements on your investments such as the use of stop orders even in the context of a bull market, though. The market is generally unpredictable, after all.
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