We are all aware of the recent economic recession in the U.S. and its impact on the economies of nations worldwide. India’s economy was also affected by a slowdown recently. Many investors lost much of their hard earned money while some were isolated from the crisis because of their diversified portfolios.
Because the stock markets are susceptible to such drastic highs and lows, it is very important for an investor to be aware of market trends when planning to invest in the stock markets. Market trends are quite simply the tendency of a financial market to move in a particular direction over time.
There are two classic markets, which are used to describe the general trend of the stock market. These are the Bull and Bear Markets. A Market is called a bull market when the economy is strong, which means that the market is growing. Bear market is the opposite and is characterized by falling stock prices and low investor confidence in the economy.
The terms and Bull and Bear were coined in the 1800s. They were associated with the bull vs bear fights. It was noticed that bulls attack with their horns upward while bears stand on their hind legs and strike with their claws. Therefore, a bull market means that buyers are trying to break through resistance levels and a bear market means that sellers are breaking through support levels.
In a bull market, a trend in the prices of shares and other instruments trend upwards. The market is also characterized by high turnover. It is generally associated with increasing investor confidence and the expectation of further gains. A market participant who believes that prices will be higher, is called a ‘bull’.
The key to successfully investing in a bull market is to exploit the increase in prices. Most investors do this by buying securities at the beginning and then look to increase its value. They then sell these securities when they reach an unprecedented high. This may sound simple, but it does involves market timing.
In general, a larger portfolio of shares can work well for a bull market. Speculators and those who run risks in the market do well in such a scenario. They buy stocks, options, futures and currencies which they believe will appreciate in value, because they know they can benefit from rising prices.
Bear markets are the opposite of Bull markets. It is a market where prices are falling for a long time. These markets are usually associated with great pessimism. Investors are called ‘bears’, because they believe that a particular company, the industry, sector or the market will go down.
If the market continues to be a bear market there is a huge potential of economic depression. However, there are many investors who take advantage of low prices and buy shares at a low price to sell later, when the economy improves.
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