The terms bull and bear generally signify the stock market conditions. In particular, these terms determine the performance and scenario of the stock market, such as the appreciation or depreciation of stocks’ value. The bull and bear markets are entirely different from each other. The stock market's direction substantially impacts one's investment portfolio. Hence, it is crucial to understand the bull and bear markets and their effect on the investments to utilize wealth creation opportunities.
A bull market denotes economic soundness, whereas the bear market occurs in a receding economy, leading to a decline in the value of stocks. Speaking of the bull market, the investors tend to buy the stocks eagerly, hoping that their investments will grow considerably in value. However, the situation is pretty opposite in the bear market. Thus investors prefer to sell their stocks, fearing that the market might crash anytime soon. It is vital to know in-depth about the bull and bear markets to understand how an investor should react to them.
What are the bull market and its causes?
The bull market refers to the rise in prices of stocks in an extensive market index within a specific period. There could be an increase in stock market prices of around 20%. There might be slight dips in the bull market, but they seem like a glitch on the radar. However, the line is usually sloping upwards in the long-term index chart. The investors’ sanguinity and confidence are pretty higher. As a result, there is a rise in the demand for buying stocks. The following reasons primarily cause it:
- Fiscal and Monetary Inducement: It takes place when the government introduces rescue and incentive packages, such as in the midst of the mortgage crisis and Covid-19 pandemic. It mostly happens to combat certain calamities and revive the economy, leading to bull market.
- Hike in Corporate Incomes: When the companies with public offerings present their annual report, their quarter-wise revenue with future prospects is also disclosed. If those figures are positive and within or beyond expectations, the company experiences tailwinds in the stock market.
What are the bear market and its causes?
The bear market depicts a downfall in the stock market from its peak. The fall has to be 20% or more precisely when emphasizing the bear market territory. In a bear market, the economy shrinks, and people lose their jobs due to the recession. As a consequence, they do not spend money as usual. In such circumstances, people are anxious and afraid to take any risks in the stock market, thus fueling the bear market conditions. There below-mentioned are the key reasons behind it:
- Inevitable Calamities: Likewise, the occurrence of a natural disaster, war, or a pandemic such as Covid-19 is beyond the control of the economy or stock market. Hence, they would undoubtedly lead to some type of market reaction, perhaps a bear market.
- Imprudently Risk-Driven Investments: When investors put money in stocks with excessive risk, it can turn unfavorably at some point in time. Consequently, the risk bubble bursts and adversely impacts the stock market and economy.
How should investors respond to bull and bear markets for making most of wealth creation opportunities?
The bull market might have numerous corrections down the lane which is a moderate decline of 10 to 20% in stocks’ value from their peak. Once we enter the bear market, the correction is complemented by recession or any alteration in the business cycle. As soon as the market begins to recover and blooms again, that depicts the end of the bear and the start of the bull. Here is how you can deal with such dynamic conditions of the stock market.
- Grab benefit of rising prices: Ideally, an investor should take advantage of rising prices in the bull market. Buy the stocks early in the drift and sell them when they reach their peak. Any losses pertaining are generally minor and impermanent in the bull market. Thus, investors can actively and optimistically put money in stocks with higher prospects of decent returns.
- Keep the investment portfolio diversified: Be it a bull or a bear market, having a diversified portfolio helps combat the downturns. Eventually, the investors can grow their money considerably in the long term. Portfolio diversification refers to distributing your investments into various companies instead of a few hand-picked ones. Putting money in diverse industries aid the investors in making a good recovery as the markets also recuperates well. Thus you can gain decent benefits from the best investment opportunities.
- Retain the investments: Buying and retaining stocks is crucial for a prosperous investment portfolio. Put your money in stocks longer duration and wait for the funds to grow. After all, going slow and steady in the stock market race would reap lucrative returns in the future.
- Patience is essential: Anxiousness and greed are the two most common emotions that prevail amongst the investors. We get fearful when there is a tumbling in the stock market. In such scenarios, most people are curious to sell their stocks. Yet, it is important to have patience and not rush out.
Think prudently while trading in stocks, and do not switch your investment tactics irrespective of the bull or bear market. If you are a long-term investor, keep buying the stocks and hold them. You will be able to survive the market recessions and pull through them over time.
The bear and bull markets will both influence your investments significantly. Hence, analyze the market conditions carefully before putting your money in stocks. Do not panic when the market turns upside down; instead, preserve the investments for the long-term. It reaps good returns when the market is recovering positively.
Try to invest your money in various financial assets to survive the market uncertainties and mitigate the risk to a great extent. Ultimately, investing wisely and patiently are the critical aspects of being a successful investor.
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