Understanding the difference between a bull and a bear market is essential for all active stock market participants. Here’s an overview of these phenomena.
If we refer to the bull and bear market history, we will notice that these phases have come alternately in the global stock markets. This means that a sharp run up will be most probably followed by a downfall in the stock market. In such situations, understanding what these two phases represent, clearly assumes great importance.
A bull market exists when the market sentiments are extremely positive and so is the investor confidence. In this phase, investors buy heavily and also get great returns on investments, in a very short period of time.
In this period, the rate of return is generally very high, compared to the return received under normal conditions. In a bull market, we often observe stocks of companies with poor fundamentals going up, just on the basis of increased buying interest.
While the chances of these stocks stabilizing at higher levels are remote, the fundamentally sound stocks do manage to sustain their gains for a long period of time. A bull market phase sees newer market highs because of improved and strong corporate earnings which are the main drivers for this growth.
The increased investment by foreign investors into stocks obviously raises their values on stock exchanges. It is very difficult to state how long this phase can last. However, a retail investor can think of booking his profits at a point when valuations of individual stocks appear too stretched.
Investing in quality stocks, with proven track record of performance and consistency in earnings should be the strategy which you must follow in the phase of a bull market.
Bear market trends are exactly opposite to those of the bull market.
It involves heavy selling from domestic, retail, as well as big institutional players, because of a fear of bigger downfall in the stock values in the days to come.
In short, the sentiments are negative because of the question mark on future growth of world, as well as domestic economies. Very few people actually have the courage to buy stocks in a bear market, even if they are available at very attractive prices, as compared to their prices at all time highs.
The financial results posted by companies are quite below standards in this phase, due to low sales and pressure on profit margins, due to rising costs. Judging exactly when a bear market will start is very difficult for common investors to predict.
Instead of waiting for the announcements by experts, one needs to track the market properly and get out of risky stocks before they cause big losses, that are difficult to recover from.
Some suggestions include avoiding the temptation of investing in penny stocks and reducing your overall exposure in the equity markets, till things stabilize and the markets are back to normal.
Consulting experts before making any actual investments is important to avoid unnecessary losses. Think over it and take the right decisions.
DISCLAIMER: Provided information is just for reference purposes and does not recommend any stock market transactions.