The stock market trend is very unpredictable. It usually swings back and forth, thus resulting in gains and losses. It is up to the investor on how he would take advantage of the trend. A good investor knows how to play and ride with the market trend, putting it to his advantage. There are 2 major types of market trends, namely bear market and bull market, each of which play an important role as they have a huge impact on all aspects of trading.
Read more on an in depth guide on how the stock market operates.
A bear market often signifies a weak economy with its transition from optimism to pessimism. It is characterized by the price of securities continuously dropping or believed to continue in a downward trend. The term “bear market” is taken from the way a bear swipes its paws downward when attacking his opponent. The market is often recognized to enter a bear market when there is a downturn of 20% or more and more than 2 months of downward trend. In the long run, it results in a slowdown of the economy and eventually rises in unemployment as companies start to lay off their losses.
Making profits in a bear market
In a bear market, supply is high but the demand is low, thus resulting in lower stock prices. There is a high chance of losses because stocks continuously lose value while the end of the trend is unsure. There are two ways investors take advantage of a bear market. One is to make gains by short selling. It is the selling of borrowed shares and buying them back at lower prices. The difference between the price of the stock when it is sold and bought back is called “covered”. Another way to make money out of a bear market is by making safe investments or investing in fixed income securities.
A bull market is the opposite of a bear market. It signifies a strong economy with the market’s transition from pessimism to optimism. It is characterized by an increase in the market price or the belief that it will continue an uptrend for a long time. The term “bull market” is a metaphor for the movement of the market trend as compared to the way a bull thrusts his horns upwards to attack his opponent. The market is believed to enter a bullish trend when there is a rise in the value of at least 20% or more. In this type of market trend, the economy is strong and the employment level is high.
Making profits in a bull market
To make money in a bull market is fairly easier than in a bear market. Here, the demand is high while the supply of securities is low since most investors do not want to sell their stocks. It is highly suggested to hold on to stocks as their interest and profit returns are high. Another way is to buy early in the trend, then sell the stocks at the peak of the trend. Compared to a bear market, there is a higher probability of return in a bull market. Any loss can be minor and temporary as the values of securities continue to rise.
As an investor, the ability to recognize the different types of markets can help you make money in stock trading. The idea is to buy low and sell high. Thus, buy stocks in a bear market when stock prices are low and sell stocks in a bull market when stock prices are high. However, knowing the best time to do this is not simple since there is no way to predict the market trend, especially when it will reach its peak. The best thing to do is to invest money on quality investments.
A good investor knows how to understand and predict the behavior of the market. Stay updated with the latest news and updates by reading market reports brought to you by Trade12. Regularly visit Trade12 for more updates about the stock market and everything about trading. Do not forget to leave your reviews and comments about Trade12’s reliable services.