Bull vs Bear Markets: The Biggest Differences
Financial experts often use the words “bull” and “bear” to describe the situation on the stock market. If you are not sure what do these terms actually mean, you have come to the right place. We have prepared a short summary of bear and bull markets for novice investors. Find out the main differences between these conditions and how exactly they dictate stock market strategies for financial traders.
The stock market is considered bullish when major indexes are rising high. It grows over 15% from a recent low and investor sentiment gets very confident. When the market is in this state, prices rapidly increase thus making more and more traders optimistic.
A bull market is a sign of a strong economy. It usually means that unemployment rates are low since businesses are expanding and hiring new people. As a result, more and more people get encouraged to invest in stocks. On average, prices go up 110% and higher during bull markets.
Naturally, all good things must come to an end. Bull markets are not an exception. Their duration ranges from several months to a few years. Moreover, they are usually longer and more frequent than bear markets. Over the past 90 years, they have occurred nearly 80% of the time.
On the contrary, a bear market is when stock prices on major indexes fall by over 20% from the most recent peak. Do not confuse it with a correction, which is a decline of 10% and more. The lifespan of bear markets is significantly longer. Note that not all corrections lead to bear markets. However, when that happens, the stock market suffers from a decline of 30% on average.
The most common cause of a bear market is a stagnating economy and high unemployment rates. It makes financial traders feel pessimistic about the market’s future. Most people expect prices to decline drastically in the near term. Nevertheless, this situation does not necessarily lead to a recession. According to statistics, it only accompanied 70% of bear markets.
As you may have guessed, most traders are risk-averse during a bear market. People are trying to protect their money. They get rid of risky stocks in favor of sure bets. This often ends in a sell-off, which results in even worse stock market crashes. In turn, many investors have to sell their investments for less than they paid for them in order to meet their long-term goals.
Bears vs Bulls
Traders are often called “bulls” and “bears”. Obviously, bulls are investors who feel optimistic about the situation on the market and are actively buying stocks. Bears, on the contrary, are willing to sell shares since they predict a stock market crash in a near future.
Even though bear markets can seem scary, they are just a part of the natural economic cycle. These periods are eventually followed by strong market returns. Regardless of your personal investment goals, you need to build a diversified portfolio to survive any bear market and gain even more profits during bull markets.