Before you start investing or make changes to your current investments, you may want to research the current direction of the markets. Trends dictate the value of your investments, and could influence when you decide to start, in what way, and how much you invest. Two phrases that describe the health of the economy and stock market are bull and bear markets, and understanding their significance could help you increase your returns or avoid massive losses.
A bull market is one that is “on the rise” and the economy is booming. They can also be indicated by a country’s strong economy, reflected by increasing employment rates. In these markets, people have money to invest and spend, driving the demand for securities up when supply is generally low.
The price of companies’ shares steadily increase, which also increases shareholder equity if you invested early on or during the climb with those companies. The growing market entices investors to buy securities while few are willing to sell them, driving share prices up as fellow investors seek equity. As shares continue to increase in value, investors grow more confident that the trend will sustain and reap profits for wise investors. Bull market investors aim to purchase stocks before share prices are driven up too high. They may also look to sell once prices have plateaued as max-earning potential has seemingly been achieved.
Bear markets are characterized by their declining economy and stocks that are consistently falling 20% or more over a set duration of time. Share prices steadily drop as people have less to invest and spend, driving share prices down with the low demand. While the number of low-value shares increases, investors eventually agree, the trend will continue. As the economy declines and unemployment numbers rise, investors begin to sell their shares before losing all of their equity. In turn, this behavior drives share prices down further, attributing to the weakening economy. Fearful of a market crash, investors typically make less risky investment decisions until the economy begins to recover.
Get in the game
One of the keys to making smart investing decisions is to know the market in which you are investing. Sometimes markets are neither bull or bear markets and resemble traits that are more stagnant. Track the ebbs and flows over a period of time, do your research, and ask financial advisors to learn more about the current market. Slight changes could simply be indicators of market corrections or short-term trends. Small gains and losses typically offset each other; however, investing in the market has proven fruitful for most, keeping investors in the game for over 200 years. Start tracking the market now to decide how you can intelligently adjust your investments or begin investing in the future.