Tuesday, February 21, 2012

Defining Bull and Bear Markets

If you listen to much financial news, you may hear a variety of odd phrases used to describe the activities of the stock market. Perhaps two of the more confusing of these are the terms "bull market" and "bear market", while these terms are descriptive of major trends across the market, if you're not sure what they mean then that information doesn't do you a whole lot of good. To help you make sense of the bulls and the bears, this article compiles definitions of each type of market as well as what they mean to investors and their investments.

Bull Markets

A bull market is the term that's used to describe an optimistic market, or one in which the prices of stocks and other securities continues to rise. Major investors are usually more than willing to make new investments in a bull market because they are reasonably sure that they'll be able to earn a profit on their investments due to the market-wide trend of growth and expansion.

What an Optimistic Market Means

Basically, an optimistic market means that the economy is doing well and that people are more willing to spend their money on investments in companies that they trust. During an optimistic market, many lesser-known companies begin to thrive because they share something in common with their well-known counterparts; sometimes it's simply being in the same industry as a well-performing company.

Though there is a lot of money being made with an optimistic market, it's important that you don't start thinking that it's a guarantee of success... the stock market is very volatile and fluid, and just because large portions of it seem to be doing well this doesn't mean that some sections can't begin to drop in value without warning. On many occasions optimistic markets end because investors are artificially inflating the price of many stocks with repeated investments, and when the stock is discovered to be worth less than what people are paying for it the market shifts from large amounts of buying to great sales of stocks and other securities.

Bear Markets

The opposite of a bull market, a bear market is the term that's used to describe a pessimistic market. Instead of rising, a pessimistic market sees the process of stocks and other securities lagging behind or falling outright. Many major investors are hesitant to make new investments in a bear market, because they know that there's a good chance that prices will fall even lower due to the market-wide trend of falling prices and reduced profits.

What a Pessimistic Market Means

As opposed to an optimistic market, a pessimistic market usually means that the economy is not doing as well and that people are less willing to spend their money on investments or anything that they don't really need. During a pessimistic market, lesser-known companies tend to struggle to stay afloat and even larger companies tend to have to make cutbacks or lay off employees until the economy picks up again.

It's important to keep in mind that though the prices of most stocks are dropping in a pessimistic market, it's still possible to make money... especially in long-term investments. Many companies will recover from pessimistic markets to show record profits in the following years, and stock prices will rise substantially. Buying shares when the prices are low can seem risky at times, but in many cases will prove to be quite profitable down the line should you stick with the investment and ride out the economic troubles.

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