Bear market vs bull market: what are they, what is the difference and how should you invest in both cases?
Investing can be a tricky business but knowing the general state of the markets will let you know what to expect from your assets.
In recent years home investing has become an increasingly common pursuit, spurred in part by the growth of cryptocurrency trading during the pandemic.
Technological advancements and the decentralised structure of the fledging online currencies made it easier for people to get involved, but some of the associated jargon can be difficult to de-cipher. The terms ‘bull’ and ‘bear’ markets are a particularly common example, but they simply refer to trends; is the market appreciating or depreciating in value?
What is a bull market and how should you invest?
A bull market occurs when a market is on the rise with favourable conditions that allow the value of the stock, currency or commodity being trading to increase in value. This market is characterised by a sustained increase in price, like a rise in a company’s share price for example.
When this is the case across the board the country’s economy is typically in a good position with broad confidence that prices will continue to rise. Employment levels are often high, with a flow of money entering the economy sustaining the price rises and spurring more growth.
When this is the case, investors are generally advised to take advantage of price rises by buying up stocks early to ride the rise, then sell for a profit. During a bull market even unsuccessful investments should represent only fairly minor losses and may even be temporary as the average price of all goods and services rises across the board.
What is a bear market and how should you invest?
In stark contrast to the upward trajectory of a bull market, a bear market involved a widespread decline in the value of assets. Often the benchmark of a 20% fall is used to define a true bear market, in relation to its recent hills.
In a bear market the value of shares is continuously dropping for a prolonged period of time, creating the belief prices will continue to fall. This encourages investors to look for a quick sale to avoid their assets being further devalued in future.
This can cause a downward spiral of price drops which can slow the economy and worsen conditions for workers. In some cases companies are forced to lay off workers to guard themselves against the bad economic trends, pushing up unemployment.
While bull markets breed confidence, bear markets foster a belief that things will continue to get worse and the likelihood of securing a return on your investment is far less. However products like fixed-income securities can shield investors from the worst of the bear market’s influence and can offer a safe haven for funds.
Defensive stocks, such as utilities, are often turned to during these periods because they are less influenced by the changing winds of the investment climate. Any investors in volatile stocks during a bear market should be aware that they will likely have to hold their nerve through the downturn before hoping to see any profits.