Sunday, 5 July 2009

Understanding Bear and Bull Markets

One of the terms you'll hear most frequently when trying to work out how to invest in the stock market is a bear and a bull market. So what does this actually mean? In it's simplest term, a bull market can be described as optimistic. Investors feel that prices are due to rise. A bear market can be described as pessimistic. Investors feel that stock prices are on the way down. As you can imagine a bear market is a self fulfilling prophecy as investors feel the price is coming down so sell shares rather than buying which adds to prices being driven down.

One of the most famous bear markets was the Wall Street crash of 1929 where 89% of market capitalization was completely wiped out. Marking the start of the Great Depression. In more recent times bear markets have occurred between March 2000 and October 2002 when the Internet bubble burst. Then of course depending on who you listen to we're living in a bear market right now with the current financial crisis!

Where did these names come from? One explanation is related to the way each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down. These actions were then related metaphorically to the movement of a market: if the trend was up, it was considered a bull market; if the trend was down, it was a bear market.

As I mentioned earlier a bear market can be seem as pessimistic as the stock prices are tumbling. In a sense it can be seen as positive for the investor as its likely there will be bargains to be had with undervalued shares. It really depends on your point of view and what kind of investor you are! Hopefully this post clears up any mystery and act as a step in the right direction!

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