As an investor, you’ll come across numerous terms and strategies over the course of your lifetime.
However, to be successful in your investing and make more informed decisions you’ll need to understand the difference between bullish and bearish markets.
If you read any stock market statistics or stock market websites, bull and bear markets are heavily used terms that describe market conditions and investor sentiment.
Whether you are new to an investing or looking to learn more, below are some characteristics of bullish vs. bearish markets and how you can make money in either market condition.
Bullish Vs. Bearish Markets
How investors feel about market conditions drives stock market performance. Whether there is a bullish or bearish market reflects how most investors believe the stock market is going to perform in the future.
Bullish market
A bull market is a term used to describe what happens when the stock market increases substantially over a period of time. As the stock market increases, more people want to take advantage of the rise in prices and put their money into the market, increasing it even further.
An example of the longest bull run in history was the one from March 2009 to March 2020. It lasted nearly 11 years and the S&P 500 gained over 400% in points during that time, with unemployment at an all-time low.
Being bullish usually means being confident that prices will keep rising. If someone is bullish on Apple stock, for example, it means that they believe the stock will continue increase. It doesn’t necessarily mean that they will buy.
Bearish market
A bear market is the opposite of a bull market. It’s what happens when the market drops more than 20% from recent highs, typically for several quarters in a row. This happens because people are afraid of putting money in the market because prices keep falling.
An example of a bear market is one of the most recent to memory; the housing crisis in October 2007. The S&P 500 crashed by nearly 900 points over the span of 5 months.
Being bearish means that you believe a price is going to go down. If you believe the Apple stock is going to decrease, then someone would describe you as having a bearish attitude.
Characteristics of Bull and Bear Markets
There aren’t many similarities between bull and bear markets — they are literally words used to describe opposite situations. Both markets fluctuate and their performance is mostly out of our control.
A bear market could be triggered by an outside event like the COVID-19 pandemic, and it can take months or even years before a bull market starts again.
The one thing they both have in common is that both markets are unpredictable. Even when there’s a bull run, professionals don’t know when it’ll crash and turn into a bear market.
The Differences
There are many differences between bull and bear markets. During a bull market, a country’s GDP (Gross Domestic Product) is high and spending is high, which means the economy is growing.
Stock prices are increasing and most people are confident that the market will keep rising. Investors prefer holding onto their stocks and are “long” on their trades. Unemployment rates are generally low or improving, since more people have jobs.
In a bear market, it’s the opposite. Unemployment rates are generally high as people lose jobs and companies go out of business. Prices are falling and people aren’t willing to buy any stock, which means the market decreases even further.
The stock market is usually a lot more volatile as more traders try to control their losses and “short” stocks. In general, a country decreases in GDP and the economy suffers.
How Do Investors Make Money in Bull Markets?
Buy and hold
The most popular way to make money in a bull market is to hold onto your stocks and investments. That’s because the value increases over time, which will translate into more profit when you sell.
Call options
This is something that professional traders do, which involves betting on the future price of a stock. If an investor is confident the stock will rise, they might buy call options so they can purchase more stocks at lower prices.
Sell at a high
If you bought your stock at a very low price, selling it high in a bull market will give you the most amount of profits. However, it’s also possible the value increases even more, which means you could miss out on some stock gains.
How Do Investors Make Money in Bear Markets?
Buy stocks that offer dividends
In a bear market, you may not profit from selling your stock since the prices may be lower than at what you bought them. In that case, you can buy stock from companies that offer dividends.
These are companies that return a portion of shares, even if the share price goes down to their investors. You’ll be able to make money no matter what happens to the market.
Short stocks
In a bear market, bad stocks can fall all the way down to zero — which is what happens when a company goes bankrupt. When a stock price falls so rapidly, many investors will short the stock since they predict the price will keep falling.
Shorting stocks is when an investor borrows shares and immediately sells them, anticipating that they can buy them back at a lower price in the near future. This allows the investor to return those stocks to the lender and cash in on the difference.
Wait it out
Investors who prefer buying and holding know that the stock market always recovers. So instead of trading and trying to find bad stocks, they will simply accept the decrease in value and wait until the stock market increases again.
This is a common strategy for those investing in Vanguard index funds for example or investing for retirement years down the road.
Sell stocks
If an investor is very worried about their positions, they may sell their stock and try to profit while they still have some sort of value. They might choose to sell and shift those investments to bonds or more secure investments.
This is an extreme bear strategy for those who want to reduce exposure to the stock market. Some investors start looking into alternative investments too, that help diversify beyond the stock market.
How to Invest In Bull and Bear Markets
Yes, you can make money whether the markets are up or down, and you can weather the volatile storms a bit too.
In a bull market, the best way to make money is to try and buy stocks when they’re cheap or during a stock market correction, and sell them when the price is at its highest (if you aren’t buying and holding).
You can try timing the market (although not something I recommend), or you can also do dollar-cost averaging and invest a small amount every week or month in a consistent manner.
With dollar-cost averaging, you’ll see your investments slowly increase over time and won’t have to worry about picking the right time. This is the most sustainable way to invest wisely in the stock market for long periods of time.
In a bear market, you’re more likely to have losses since prices will keep falling.
You can use this as an opportunity to buy stocks when they are cheapest so you’ll profit when they rise again. Or as mentioned earlier, you can short the markets while they are crashing down.
You can also choose to invest in safer assets during this time such as bonds, CDs, or looking into alternatives investments like real estate, art, gold, etc.
- You can invest in real estate crowdfunding with Fundrise, DiversyFund, or Groundfloor.
- You can invest in fine art by well-known artists with Masterworks.
- You can buy and store physical gold or use Vaulted, which makes it easier to store and invest.
Frequently Asked Questions
What is the longest bull market in US history?
One of the longest bull runs in U.S. history ran for 11 years and spanned from March 2009 to March 2020. The COVID-19 ended the run as businesses and uncertainties about the world, but the stock market quickly started recovering.
What is the longest bear market in US History?
There have been a few bear markets in the U.S. history, but one of the longest bear markets ended way back in 1942 and lasted 61 months. The index had decreased by a whopping 60%.
What is the difference between a bear market and a recession?
Although they both describe a similar situation, they refer to different aspects of a downturn. A bear market is used to describe a decline in the stock market as prices decrease. A recession is used to describe a reduction in the economy by measuring the GDP. There are cases where the stock market can rise while the economy shrinks, which shows that the stock market does not always represent the state of the country.