You might come across the term ‘bull’ and ‘bear’ very often in the stock world.
These terms indicate how investors feel about the market and the upcoming trend. While there are bull markets and bear markets, there are also bullish investors and bearish investors.
Understanding the bear versus bull dichotomy will guide you to trade wisely and build your trading strategies.
Pic from CNBC
A bull market refers to a market that is on the rise.
A bullish investor is when a person is optimistic and believes that stocks will go up. He or she is referred as a “bull” and is said to have a “bullish outlook”.
In a bull market, everything in the economy is great, employment rate is high, Gross Domestic Product is growing, and stocks are rising.
Investors have faith that the uptrend will continue in the long term. Thus, it’s easier to pick stocks during a bull market as everything is going up. An investor can confidently invest in more equity with a higher probability of making a return.
In a bull market, an investor should take advantage of rising prices by buying early in the trend, collect on earnings as the stock continues to rise and then selling them when they have reached their peak.
As prices are on the rise, any losses should be minimal and temporary. For example, if a stock’s price rises five days in a row and drops on the sixth day, it is predicted to rise again on the seventh day.
Bull markets cannot last forever however, and sometimes they can lead to dangerous situations if stocks become overvalued.
Pic from CNBC
A bear market refers to a market that is on a decline.
A bearish investor is when a person is pessimistic and believes that stocks will drop. He or she is referred as a “bear” and is said to have a “bearish outlook”.
A bear market is when the economy is bad or slowing down, unemployment rate rises, recession is looming and stock prices are falling.
Investors believe that it will be a downward trend in the long run. Hence, bear markets make it tough for investors to pick profitable stocks.
Losses are considered to be substantial. Any gains are deemed to be minimal or temporary. If you do decide to invest with the hope of an upturn, you are likely to receive losses before any turnaround occurs.
To make money when stocks are falling, some may employ the short selling technique where you sell securities that are lent to you by a broker, and subsequently repurchase them at a lower cost than the initial short sale to make profit out of the price difference.
*Text by Chris Tan