Bear vs Bull Markets - What is the Difference?
By Dale Gillham |
I’m sure many of you have heard the story of the tortoise and the hare. But have you heard the story of the bear and the bull?
The terms bull and bear markets are often used to describe how stock markets are moving in general—whether they are rising in value or going down in value.
So what is a bull market? A bull market is a when a market prices are rising or are expected to rise while a bear market is a market where prices are falling or expected to fall.
These seem like odd names to use to describe market movements for the most part but interestingly the terms came from the way animals attack their prey.
A bull thrusts its horns up into the air, while a bear swipes its paws downward. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.
History of bull and bear markets
Bull markets typically tend to span for longer periods of time and generally have greater returns than bear markets.
Due to the fact that bear markets are so short and severe, it’s often difficult to get out in time.
In many cases, by the time people realize they’re in a bear market and start to panic sell or hold and continue to suffer losses.
Chances are, however, they are probably closer to the beginning of a bull market but given that they panic sold they’re more than likely to miss maximizing on run.
What to do?
In a bull market, investors should take advantage of rising prices by buying early and then selling later when the prices have reached their peak. During a bull market, investors can invest in more equity with a higher probability of making a return.
In a bear market, the chances of loss are greater because prices are continually losing value. Investors are better off short selling or investing in safer investments, such as fixed-income securities.
Bear market vs a correction
A bear market should not be confused with a correction, which is a short-term trend that has a duration of fewer than two months.
While corrections offer a good time for value investors to find an entry point into stock markets, bear markets rarely provide suitable points of entry. This is because it is almost impossible to determine a bear market's bottom.
Trying to recoup losses can be an uphill battle, unless investors are short sellers or use other strategies to make gains in falling markets.
Short selling in bear markets
Investors can make gains in a bear market by short selling. This technique involves selling borrowed shares and buying them back at lower prices.
A short seller must borrow the shares from a broker before a short sell order is placed. The short seller’s profit and loss amount is the difference between the price at which the shares were sold and the price at which they were bought back, referred to as "covered."
For example, an investor shorts 100 shares of a stock at $94.00.
The price falls and the shares are covered at $84.00. The investor pockets a profit of $10 x 100 = $1,000.