Jerry Mononela - Bear v/s Bull Markets: A Simple Guide For Understanding Stock Market
The craze for finance in today’s population is exciting, and sensationalism has entered the finance sector of the global market. Pin it on cultural developments through films or TV, or through a general sense of being financially sound across the population, everyone wants a piece of the stock market.
Many believe that the stock market is a gold mine where you can get rich quickly while many believe that stocks are the trajectory followed when money is flushed down the drain. Well, Jerry Mononela (that would be me) is here to tell you that the precious stock market is neither. It is a fast-paced, predictable yet unpredictable mechanism that needs to be studied properly. A well understanding of such a complex mechanism is necessary to get the most out of it. And that is what most people forget.
A proper understanding of the stock market would be ideal but a person who wants to invest his finances however small simply must have some technical knowledge of the world he is about to enter. That’s why I, Jerry Mononela, will start a simple guide for beginners looking to become an ‘investor’ to get a proper grasp of the oh so popular stock market of today.
And first things first, an investor must know about the two most popular types of markets over the years: The Bull, and The Bear.
Oh the bull, the lovely, supercharged bull. A bull market is a market that lays low in its formative years only to charge up when it has matured. The development of a bull market on its graph eerily simulates how a bull attacks, charging from the down low to the top.
Though the etymology should be enough for an investor to understand how the market works, let’s just for the sake of it, mention some technical terms as well. In a bull market, the stock value increases by a value of 20 percent over a significant period in the lifetime of the stock.
In the initial phase of the bull market, the stock price is extremely low but is speculated with a high promise by investors and stockholders. It is often categorized as an optimistic market as investors get their exponential profits after a long period.
A typical bull market averages over about 9 full years and generates an average of 480 percent gain for the initial investors, which makes it an avenue to incur short term losses to generate long term profits.
The bear market is termed as such because a bears attack from up and then go charging down. Prices in a bear market are volatile and tend to fluctuate a lot, but mostly on the downside. Bear investors usually invest early on and sell after a short time believing prices will continue to go down.
This trend in investor psychology of thinking stocks will go down leads them to sell their share even at a lower price as soon as possible to stop further losses. This in turn again leads to the stock crash as more and more investors start to believe that their stock will become worthless, so the company spirals into recession and starts laying off workers resulting in a mass financial deficit in the general population: how an economic crisis starts in a country.
It is not called a bear market if the stock prices go down a bit for a period. For a market to be officially called a bull market, the stock has to fall by a 20% decrease when compared to the most recent peaks in the graph.
Bear markets usually have lasted about 1.4 years on average throughout history and end in a net 41 percent loss for investors. This characteristic of a bear market is what makes it much less investable in the eyes of investors who prefer to ride the bull to get a long time, low risk, high reward return on their money.
How Bear And Bull Markets Compare Over The Years
A bear and a bull market come hand in hand if you look at the market timeline from over the years. A bull market is succeeded by a brief but disruptive bear market. We were currently in the longest-running bull market in the history of the stock market but due to the coronavirus crisis, many stocks have declined significantly while the USA is officially in recession.
Since 1929 there have been 25 bull markets but only 9 bear markets, proving that bull markets are more popular than bears and have brought on significant change for investors and society alike. But investors don’t profit from only a bull market, there are many clever ways for an investor to take advantage of a bear market as well.
How Do Investors Act In The Market
Though there is no definite strategy of how investors work in a bear and a bull market, here is a simple timeline to go through to understand what the typical investor psychology consists of.
Start of a bull market- investors put their money on a long term strategy hoping to get a high reward as they believe stock prices will go up.
The peak of a bull market- investors are looking to sell their stocks at a high price and get an excellent exit as they believe it is the peak of the market.
Start of a bear market- A crisis occurs or investors start believing that a crash might be coming, they sell their stocks to sit on cash instead of stock as assurance. This leads to more and more investors panicking and selling the stock at a lower rate to not incur further losses, and subsequently, the market crashes due to extremely low trading rates.
End of a bull market- investors are looking for a low-priced stock that will reward them with benefits in the future and thus a bull market starts to develop again.
That is a very brief and simple summation of what bull and bear markets are, their timelines, and the psyche of investors during different markets. If you would like more details about the stock market, book a consultation with me, Jerry Mononela on my website. I provide financial advice on stock markets and investors alike in and around South Africa.