Financial Literacy Friday: Bull vs Bear Markets
Welcome back to another edition of Financial Literacy Friday where today we’ll be discussing bull vs bear markets. These terms have become somewhat mainstream, but for those who are just getting into taking over your finances, you may not know what these terms mean. So, I’m going to take a little bit of time and break down each type of market and give you the reasoning behind their names. Let’s start with bull markets.
A bull market is one that is characterized by the upward trend of prices of whatever is being traded on that market, whether that’s stocks or bonds or other commodities. We are currently in a strong bull market, which means that the stock market is doing well and prices are going up, so it’s been a great time to have investments as they will likely have gained in value. Generally, a bull market is when stock prices rise by about 20% after a period of decline by that much. As such, it’s very difficult to predict bull markets until we’re already in one. Perhaps some of you are aware of the charging bull statue outside the New York Stock Exchange? That represents the strength of a bull market and financial optimism that the markets will gain in value. The bull market is so named because when bulls attack, they thrust their horns upwards into the air which reflects the upward trend of market prices. However, all good things must come to an end and that brings us to:
Bear markets are the other side of the coin to bull markets and represent when prices are declining. This means that while bull markets typically gain 20% in value, bear markets erase that much. However, bear markets shouldn’t be confused with market corrections, which can be short downturns in the market, but don’t last long enough to be considered an entrance into a bear market. For those of you who had investments in 2008-2009, you’ll remember how much damage a bear market can do to your portfolio, especially if you were not very broadly diversified. Like a bull market, it’s quite difficult to tell when we enter or leave a bear market until it’s already happened, which is why there’s a great deal of pessimism during a bear market. However, for those who have a long time horizon and know that the markets will go back up eventually, it can be seen as a time when stocks and other investments are on sale. As for the meaning behind the name, like the bull attacks upwards the bear swipes down when it attacks which signifies the downward trend of markets.
That’s the overview of both bull and bear markets, which are useful terms to know as they represent significantly different market climates. If you have comments or questions, please leave them below or reach out to me personally.