What is more important than investing capital in the stock market? Having enough skills to monitor and follow the market keenly, right? One element of monitoring the market is understanding the kind of market condition and shifting or resetting your portfolio according to that. The bull and bear markets are conditions of the market you just can’t overlook Bull vs Bear Market:.
In this post, we will learn how to identify these two markets in detail and what you need to do about them.
What is a Bull Market?
A bull market is when the market’s current condition is rising. This means the prices are rising or are expected to rise. The term ‘Bull’ is often used to refer to the stock market. It could also be applied to other trades, like real estate, bonds, and more, but it is a typical word for the stock market.
Since the prices of securities rise and fall essentially during the time of trading, the bull market is usually reserved for extended periods where a large portion of the security is rising. These market conditions tend to last for months and sometimes even years.
Bull markets are optimistic in nature; the investor gains confidence and expects strong results to continue for a period of time. It is quite hard to estimate when the trends in the market could change, but that is a part of the psychological effect where speculations would play a huge role.
For instance, you used to invest in some of the best footwear stocks in India. During a bull market, you can notice that the prices on this list aren’t the same anymore. They have gone up quite a bit without even a minor prediction.
Since these bull markets are hard to predict, an analyst can typically only find this phenomenon after it happens.
What Causes a Bull Market?
Bull markets usually happen when the economy or the country is strengthening or if it is already quite strong. They tend to incur in line with a strong GDP and drop with unemployment and would often cross paths with the rise in corporate profits. Investor’s confidence would also tend to rise through the bull market, and the overall demand for stock would be positive. Along with the wholesome tone of the market, there would be a general increase in the amount of IPO activity during the bull markets.
Some factors mentioned above can be more easily quantified than others, right?
Though corporate profits or unemployment could be quantified, it could be harder to gauge the general tone of the market.
What is a Bear Market?
A bear market is when a market experiences prolonged price falls. It usually describes a condition where securities prices would fall by 20% or even more. This would be a fall from recent highs from widespread pessimism and negative investor sentiment.
Bear markets are often associated with declines in the overall market or a particular index. They could also be caused by general economic downturns, like recessions.
Stock prices would generally reflect future expectations of cash flow and profit from companies. As growth prospects wane and expectations are dashed, the prices of stock could fall. This is herd behavior, fear, and rush to protect losses, which could lead to prolonged periods of depressed asset prices.
But, the causes for a Bear market can vary a lot, it could be sluggish economies, pandemics, geopolitical crises, bursting market bubbles, and much more. Even the changes in tax rates could cause a bear market. These markets can last from weeks to years and will produce below average returns.
Bull Vs. Bear Market
| Bull Market | A phrase used when prices rise or are set to rise. | A bull market typically happens when the economy is doing well, and investors hold a high confidence level. |
| Bear Market | A phrase used when prices fall by 20% or more. | A bear market happens when there is prolonged pessimism among investors, and the economy sees downsides. |
How to Invest in a Bull Market?
Here are some bull market trading tips you need to keep in mind:
1. Buy Early
While the exact onset of a bull market run could be tricky to estimate, a method to make sure it is recently happening is the third touch of price action on a single line. With an expected continued upward trajectory, this is a great time to take a long position or even buy physical assets.
2. Take Your Profits in Intervals
The aim to lock profits at regular intervals is a great way to secure or even stack up on profits and yields.
3. Don’t Sit on Losses for Long
Planning your exit beforehand could help to limit your losses. A method to do this is by deciding to close your position or sell your assets if the price closes below the trend line. You could also opt for short selling if you are seeing a decline.
4. Follow the Momentum of the Market
The trend is your friend, and that is a true saying. It is quite crucial to keep in mind that despite the steady, prolonged increase of prices in a bull market, it will consist of both rising and falling share prices. This states it is possible to incur loss in a bull position too, to make it a point to analyze the goings of the market trend intensely.
How to Invest in a Bear Market?
Surviving the bear market could be quite tedious, and here we will tell you how to do it:
1. Dollar Cost Averaging is Your Friend
Assume the price of a stock in your portfolio falls 25%, from Rs. 100 per share to Rs. 75. If you have money to invest and want to purchase more of this company, it might be tempting to buy when the price appears to have plummeted.
The problem is, you’ll probably be wrong. That stock may not have bottomed at Rs. 75 per share; instead, it might fall 50% or more from its peak. This is why attempting to identify the bottom or “time” of the market is a dangerous endeavour.
Dollar-cost averaging, a method that involves regularly adding money to the market, may be more effective. This helps spread out your purchase price over time, ensuring you don’t invest all of your money in a company at its peak (while still taking advantage of market troughs).
2. Diversification is Key
In addition to purchasing stocks at lower prices, increasing the diversity of your portfolio — so that it contains a variety of assets — is a good approach, bad market or not. During bear markets, all businesses in a given stock index tend to decrease – but not always by the same amount. That’s why a well-diversified portfolio is essential. Investing in a mix of relative successes and losers helps to reduce total portfolio losses.
3. The Long Term Matters
Bear markets challenge the resolve of all investors. While these are terrible times, history tells us that the market will rebound quite quickly. And if you’re investing for a long-term objective, such as retirement, the bad markets you’ll face will be outweighed by the bull markets. Money needed for short-term goals, which are often achieved in less than five years, should not be invested in the stock market.
Conclusion
How investors identify the behaviour of the stock market impacts and determine its behaviour. Investor psychology and sentiment are elementary to whether the market will go up or down. In either case, you should aim to buy stocks at the lowest price possible so that when the market rises, you can profit from them.
