In investing, bear and bull trading refer to specific stock market trends.
Bull markets are named for the way that bulls “push up” with their horns. Typically, bull markets – also called bull runs – occur in favorable economic conditions with high employment rates. During bull markets, investors tend to believe that the uptrend will continue, leading to a sustained increase in companies’ share prices.
By contrast, bear markets are named for the way bears “smack down” their prey. Bear markets usually occur in receding economies experiencing sluggish or negative growth, often marked by rising unemployment rates. During “true” bear markets, investors believe that the downward trend will continue, leading to a sustained downward spiral that sees losses 20% or more.
Financial markets and investor attitudes tend to be intimately intertwined. As such, bear and bull trading doesn’t just describe investment trends, but how investors feel about the market.
In bull markets, securities experience strong demand and weak supply, leading to rising prices, and investors competing to buy in and make a profit. During bull markets, consumers often spend more, leading businesses to report higher profits that contribute to increasing stock prices. Overall, this can lead to a rise in your portfolio’s value and general investment returns.
The opposite is true in a bear market. As prices begin to drop—perhaps catalyzed by a weak earnings season, poor economic conditions, or high unemployment rate—investors want to sell their stocks. The more investors flee the market, the more prices drop, which spooks more investors. Businesses may also see weaker profits as unemployment rises and consumer spending drops, further perpetuating the cycle. As a result, you may see a decline in your portfolio’s value and investment returns.
Both bear and bull trading can greatly influence your investment decisions, as both present risks and unique trading opportunities.
In bull markets, investors can take advantage of rising prices by getting in early and selling when prices peak. However, attempting to time the market can be risky—though bull markets come with a higher probability of seeing returns, there’s no guarantee, especially if the market crashes.
In bear markets, the chance for losses rises because prices continually decline. Even if you do invest in the hope that the market will rise, you may take heavy short-term losses. As such, many investors turn toward “safer” investments like fixed-income securities or defensive stocks to ride out bear markets.
But the best investing strategy to ride out both bull and bear markets is to take a long-term, buy-and-hold approach. This strategy includes diversifying your portfolio to minimize losses and maximize returns. And if you still have a few decades until retirement, a long-term approach means you can afford the risk of buying otherwise high-quality stocks in a bear market, allowing you to buy low and potentially profit when the tide turns.
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