There are two ways to describe the general conditions of the stock market: it can be a bull market or a bear market. A bear market indicates the continuous downward movement of the stock market. Conversely, a bull market indicates the constant upward movement of the stock market. A particular stock that seems to be increasing in value is described to be bullish while a stock that seems to be decreasing in value is described to be bearish.
The bull and bear terms do not refer to the short term fluctuations in the stock market. A bear market is the stock market wherein the prices of the key stocks have fallen by 20% or more over a period of at least two months. Prices, even during a bear market, may temporarily increase. Bull markets, being the opposite of bear markets, indicate a rise in the prices of the key stocks over a certain period of time.
The economical state of a country is usually reflected through the stock market conditions. The stock market of an economy with reasonable interest rates and low unemployment rates is considered to be bullish since it is doing just well. Bear markets, on the other hand, usually occur during a slowdown in an economy. The investors tend to lose their confidence and the companies begin to lay off their workers. An exaggerated bear market will eventually lead to a crash that is brought on by panic selling while an exaggerated bull market will actually result to a market bubble that is brought on by investor over-enthusiasm.
Even if most money can be made during bull markets, bear markets also present a lot of financial opportunities. Investors use their knowledge of the characteristics of each type of market as an investment strategy. It is expected that a bullish market will generate a huge number of investors who wish to buy some stocks. Because a bullish market could also mean that the economy is doing well, there will be a lot of people interested in buying stocks since they have the extra money to spend. This kind of situation will cause an increase in the prices of the stocks because there will be a shortage in the supply of stocks. During bear markets, it is expected that a lot of investors will have the desire to unload their stocks and put their money in fixed-return instruments like bonds due to the continuous decrease in the prices of the stocks. Supply tends to exceed demand as money is withdrawn from the stock market. This causes the prices of the stocks to lower even further.
It is easier to make money during bull markets. In a bull market, all dips are temporary and they are going to be corrected any time soon. Since the upward rising of the prices cannot go on forever, the investors need to sell their stocks when the market reaches its peak.
Bear markets are considered to be opportunities of picking up stocks at bargain prices. Approaching the end of a bear market will offer the greatest chance to generate some profit. Since the prices will most likely fall before they recover, the investors have to be prepared for some short-term loss. One investment strategy used during bear markets is short selling. It involves the selling of the stocks that they do not own in the anticipation of further decrease in prices. This strategy gives the investors a chance to buy the stocks for a price that is lower than their previous selling price.
During bear markets, fixed-return investments such as CAs and bonds can also be used to generate income. Defensive stocks, which include government-owned utilities that provide necessities despite the current economic state, are also safe to buy even during bear markets.
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