Bull and Bear Markets are the names used to describe general stock market conditions. In short, a bull market describes a general market trend of rising prices and increased investing. A bear market occurs when there is a general decline in the stock market over a period of time.
Bull and bear markets are also characterized by the general investor sentiment. Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. In a bear market, generally there is a swing from high investor optimism to widespread investor fear and pessimism.
As well as describing the market trends and conditions, “bull” and “bear” are also names given to investors with specific beliefs and trading styles.
A ”bull” refers to an investor who believes that a market or individual stock will rise in value. A bull expects prices to rise and, on this assumption, buys a stocks in the hope of reselling them later for a profit.
A”bear” is someone who believes that the market or stock will drop in value. A bear expects prices to decline and, on this assumption, sells a commodity in the hope of buying it back later at a lower price, a speculative transaction called short-selling.
While many investors fall into one of the two categories, and tend to follow their pattern of investing, regardless of actual market conditions, bull and bear markets go in cycles.
Eventually, every bull market phase will peak, and reach a"market top" or a stock-market bubble. This peak is not usually a dramatic event. People are naturally unaware at the time that the market has reached the highest point it will for a few years.
A decline then follows, beginning a bear market phase. The decline is usually gradual at first and then gains momentum.
A ”market bottom” is when the market reaches it's lowest point. This signals the end the downturn, and precedes the beginning of an upward moving trend or new bull market phase.
It is very difficult to identify the bottom, or end of the downturn, while it is occurring. An upturn following a decline is often short-lived, followed by a resumed declining of prices. This can bring losses for an investor who purchases shares during a "false" market bottom, and must then sell them at an even lower price due to insufficient liquidity.
Some people believe that recognizing bull and bear markets is a key way to make money on stock trading and investing. The basic principle for profiting from trading is to buy low and sell high. One way to do this is to buy stocks in a bear market when the prices are low and sell stocks in a bull market when the prices are high. However, recognizing the best times to buy and sell is not that easy.
It's tough if not impossible to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation can sometimes play a large (if not dominant) role in the markets.
Many investors sell in a bear market, either because they become too emotional about trading and don’t want to risk bigger losses, or they don’t have the liquidity to hold onto their investments while awaiting a market reversal.
If a large number of investors are fearful and pessimistic during a bear market, they are likely to contribute to further declines by “panic selling.”
Conversely, the optimism and increased trading that occurs during a bull market serves to boost investor confidence. The increased liquidity results in higher volumes of trading, further raising the prices of stocks.
The best way to make money, regardless of the cycles of bull and bear markets, is to create a varied portfolio of investments, and to maintain sufficient liquidity to ride out the tough periods without needing to resort to panic selling.