'Bull' and 'bear' are two terms used in the investing world to describe the prevailing trends in the stock market. Both terms denote how the stock market is doing, whether it's going up or down in value. The bull and the bear are parts of the stock market cycle. Therefore, as an investor, understanding these two scenarios will help you make sound investment decisions that will positively impact your investment portfolio.
A bull market refers to a financial situation when the prices of stocks and tradable assets rise by at least 20% from a recent low over a sustained period. Bull markets usually occur due to a thriving economy and high employment levels. Such a market indicates that investors have faith in the government and the stock market. During a bull market, there is high investor confidence and more income for people to invest. Generally, bull markets are frequent and last longer than bear markets.
A bear market refers to a period when prices of stocks and securities fall by at least 20% from a recent high. Bear markets occur due to slow economic growth and high unemployment rates. During this period, investors' confidence is low, and they start looking for ways to diversify their investment portfolio in less risky assets. Even though not always, the downward trend during bear markets may be accompanied by a recession.
The best way to make money during bull and bear markets is by knowing how to spot when the stock market is appreciating or depreciating. This is usually the best time to enter or leave the stock market.
During a bull market, you can expect the following to happen:
On the other hand, you can identify a bear market if the following occurs:
Investors who want to profit from a bull market should invest in the rising stock prices using the following ways:
A long position in the stock market refers to buying and holding a stock or security with an expectation that it will increase in value. During a bull market, you can profit by purchasing a stock or security at a low price and then selling it when it has reached its peak.
A call option refers to a contract between a buyer and a seller for the former to purchase a stock at an agreed price (strike price) until an agreed period elapses. In this contract, the buyer has the right but not the obligation to purchase the stock. On the other hand, the seller must sell the stock to the buyer if the latter exercises the call option.
During a bull market, it's likely for the stock price to rise above the strike price. When this happens, the buyer can exercise the call option, buy the stock at the low strike price, and then sell it at a higher price on the open market. By doing so, the buyer will make a profit.
Almost all Exchange-Traded Funds (ETFs) follow a certain market average. As an investor, you can purchase a low-priced ETF if you anticipate the market average it follows to rise. For instance, if the Dow Jones Industrial Average (DIJA) rises by 15%, your ETF will likely increase in value by almost the same.
Bear markets are known to cause people a lot of stress. However, investors can still profit in a bear market through the following ways:
A short position refers to when an investor borrows and sells a stock or security with the anticipation that it will fall in price. Investors do this intending to repurchase the stock or security at a lower price to cover the short position and make a profit.
A put option is a derivative that gives you the right and not obligation to sell a stock or security at an agreed price (strike price) before an agreed period elapses. If the stock price falls below the strike price, you can sell it at the strike price and make a profit. You also have the option to sell the put option itself and make a profit.
Short ETFs, also known as inverse ETFs, generate returns that are inverse to the decline of a certain market average. Suppose you purchase an inverse ETF that follows the S&P 500. If the S&P 500 falls by 20%, your short ETF will increase in value by approximately 20%.
As an investor, it's easy to profit in a bear market using put options, short ETFs, and short positions. The key is identifying a bear market and utilizing these investment tools to the fullest. For these and more investment tips, make sure you check out BrownInvestors.com.