In a nutshell, a bull is seen as someone who is optimistic and believes that stocks will rally. This is a bullish outlook. On the contrary, a bear is an investor who is pessimistic and believes stocks will decline in value. They are said to have a bearish outlook.
[This is a guest contribution from Vinayak Maheswaran]
Things to do in a Bear Market
A bear market alludes to a fall in stock prices of at least 15-20 percent, together with negative sentiment underlying the market. Stock investors are very wary of these periods.
An economic slowdown calls for a realistic mindset. If you looked through business cycles, you would have gathered that the stock market can go for years in negative territory. During a bear market, one easy way to limit losses is to play dead. Stay calm and don’t make sudden moves. Invest in money market securities and leave a large part of your portfolio in cash. Cash holds value and will earn interest in a bear market while stocks dive south. Plus, when the right buying opportunity comes along, you’ll have enough cash to make some moves.
Bear markets provide opportunities for investors to pick up value stocks. Try to go in with an idea of what you need. Stocks are underpriced in a bear market and have often declined in value for some time. Value investors are on the lookout for stocks at this time and they come at attractive valuations. Real bargains come up during a bear market.
But there has to be some research involved as not all stocks are available at a bargain. If you want be a really good value investor, have good strategies to pick up stocks in a bull and bear market. Less than cheery times afford the opportunity to add positions in your favorite stocks.
An aggressive strategy in a bear market is short selling. As the stock spirals down, the investor makes a profit with this strategy. However, there are significant risks that come with taking a short position in a company and you could lose more than 100 percent of your initial investment.
Another thing you could do in a bear market is to look closely at your asset allocation and make adjustments. Bonds provide a higher return than stocks during this time. Alternative assets are worth looking in to as well. Investing in equities in defensive industries also make a lot of sense. Companies in these industries provide goods and service that consumers, governments and the economy as a whole need regardless of the weather. A simple example would be household non-durables like shampoo, toothpaste, shaving cream, etc (things that get used up quickly). People still need to take a wash, brush their teeth and shave whether the economy is booming or not.
Things to do in a Bull Market
A bull market refers to the time when prices are rising. There is a sustained increase in share prices and investors believe that that the uptrend will hold over the long term. Additionally, the country’s economic indicators are strong and employment levels are good. It is interesting to see the supply and demand of securities in a bull market. There is strong demand and weak supply as a lot of market participants are interested in buying as opposed to selling. If you have shares it would be best to reduce your position at this time.
On the other hand, bull markets offer a good time to buy equities. Investors move their money out of fixed-income securities and into the stock market as most everyone is interested in the market. They are willingly participating with the aspiration to obtain a profit.
It is good to check consumer spending at this time. If people have more money and are willing to spend it, this bodes well for the stock market and the strength of the economy. In a bull market, investors should get in early and buy at the start of the uptrend so that they can get ready to sell when the market has reached its peak.
One thing to note here is that is impossible to determine precisely when the bottom and peak will come up. Regardless, look for strong fundamentals in the companies you are investing in. There has to be solid sales and earnings with the figures rising compared to the earlier year. The company’s products and services need to make some sense to you. If the public is demanding more of the stuff the company is selling, this is a very encouraging sign.
The stock’s class is very important to consider as well. A small-cap stock with great growth prospects can be an investment which comes with an element of risk compared to a large-cap stock that has been a market leader for some time. You’ll have less risk when you purchase the shares of a company that is producing positive growth in sales and earnings.
Bull and bear markets can be very good for high quality stocks and if you’ve done your research it may be time to cash in as the prices go up. You might want to look at cyclical stocks in the automobile, housing, industrial equipment and technology industries as they resume growth in a rising market. As the economy picks up, these industries are poised to rebound.
In a bull and bear market, investors can make money with these strategies outlined. Don’t be afraid to make the necessary moves to safeguard or add to your portfolio. Remember, in the long term, the stock market has posted a positive return. Even as the quality of the investments is important, investors should ascertain what the market is doing as they make their decision. But it must be kept in mind that there is no sure way to forecast market trends.