Wall Street loves to label stuff. When markets are rising it’s a “bull market.” Conversely, falling prices are a “bear market.”
Interestingly, while there are some “rules of thumb” for falling prices such as:
- A “correction” is defined as a decline of more than 10% in the market.
- A “bear market” is a decline of more than 20%.
There are no such definitions for rising prices.
Simply, rising prices are “bullish.”
It’s all a bit arbitrary and rather pointless.
As investors, it is important to understand what a “bull” or “bear” market actually is.
- A “bull market” is when prices are generally rising over an extended period of time.
- A “bear market” is when prices are generally falling over an extended period of time.
What to Do in Each Market
In a bull market, the ideal thing for an investor to do is to take advantage of rising prices by buying stocks early in the trend (if possible) and then selling them when they have reached their peak.
During the bull market, any losses should be minor and temporary; an investor can typically actively and confidently invest in more equity with a higher probability of making a return.
In a bear market, however, the chance of losses is greater because prices are continually losing value and the end is often not in sight. Even if you do decide to invest with the hope of an upturn, you are likely to take a loss before any turnaround occurs. Thus, most of the profitability can be found in short selling or safer investments, such as fixed-income securities.
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