Some terms commonly used by traders and investors in the stock markets may seem odd to outsiders. A common example is bull and bear markets. Both bears and bulls are known as strong and unpredictable, but how did they become associated with stock market volatility? More importantly, how would a bull or bear market impact your portfolio?
Let’s explore below.
What is a Bull Market?
In a bull market, stocks will generally increase in price over several months or even years. The reason for this is that there are more buyers than sellers in the market, and when demand outweighs supply, prices rise.
Bull markets typically occur during times of economic growth. They are characterized by GDP growth, reduced unemployment and increased company profitability. Investor confidence is usually high during bull markets. The demand for stocks is high and market commentary tends to be positive.
What is a Bear Market?
In a bear market, sellers outnumber buyers, thus stock prices decline. Historically, they do not last as long as bull markets. They should not be confused with market corrections, which usually last a few days or weeks. A way to identify a bear market is if stocks drop by 20% or more of their peak value. It is possible to make money in a bear market, especially if it is in its advanced stages, by buying stocks for less money while anticipating that their prices will rise again.
Where did the terms come from?
While the actual origins of the expressions are unclear, the most frequently given explanations come from the way each animal attacks its opponents. Bulls usually thrust their horns into the air, thus they symbolise price increases. Bears, on the other hand, swipe downwards, hence their use to represent price dips in the market.
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