Are you interested in investing but feel that you do not understand the language investors use? Have you heard the terms bull market and bear market and would like to know what they mean and what phenomenon they describe? No problem, this article will explain it.
Bull market vs. bear market
A bull market and a bear market are opposites. These terms aim to give investors a quick overview of the current situation on the market. So what exactly do they mean?
A bull market is, put simply, a period when share prices are rising. It usually indicates a period of economic growth. The generally accepted definition of a bull market is that share prices have risen by 20%. A bull market goes hand in hand with strong GDP and low unemployment. It also often coincides with growth in company profits.
The reference to the bull comes from an analogy with a bull and the way it attacks. A bull catches its victim on its horns and lifts it upwards. Prices of shares and other assets rise in the same way.
A bear market is the opposite of a bull market. It is a period when asset prices fall over the long term. However, a bear market does not have to be a disaster for investors either. On the contrary, it is an opportunity to buy shares, bonds and other assets at more favourable prices with greater growth potential. Of course, some companies may not survive a long-term fall in their share prices and may go out of business. As a general rule, a bear market is said to occur when a share price falls by 20%. However, there is no exact definition, just as with a bull market.
A bear market is called a bear market using the same analogy as a bull market. It refers to an attacking bear, which attacks by pushing its paws downwards. Share prices fall in the same way.
What a bull market means
Market movements are fairly difficult to predict. This is why economists can usually only say that it is a bull market once it has already happened. One of the best-known examples of a bull market in recent years is the economic growth between 2003 and 2007.
During a bull market, more investors enter the market. This is because everyone wants to buy shares with the potential for high returns in a period of strong growth. However, investors should be careful with shares that promise above-average returns. These are usually more volatile and riskier shares. This is where it makes sense to diversify your portfolio so that you do not lose everything.
Buy and hold strategy
This is a long-term investment strategy in which an investor buys investment assets such as shares, ETFs or cryptocurrencies. The investor holds them for a longer period of time without frequent buying or selling. This strategy is based on the assumption that markets will grow over the long term and that the price of these assets will therefore also rise.
However, it often happens that the market starts a downward trend. Even in these situations, investors can stay in the market and keep their position. From a long-term perspective, it is clear that the market can turn around and investments can not only return to their original value but also continue to grow. During downturns, investors also have the advantage in that if they buy shares, ETFs or other assets regularly, the price is sometimes lower and sometimes higher. Market fluctuations are therefore balanced out by the average purchase price.
According to current economic reports, the bear market trend slowly began to reverse last year and we are now entering a bull market.
If you are interested in investing and want to find out what to invest in in 2024, take a look at this video as well. You can also read our article on Top Czech shares.
How a bull market definition works in practice
A bull market is usually measured from the lowest point of a previous fall. Analysts follow a broad stock market index rather than a single share, because an index shows how the market as a whole is moving. When the index climbs about 20% from its recent low, people start to call it a bull market. The bull market is then considered to last until prices fall about 20% from their highest point.
Here is a simple example. Suppose you hold an index fund worth $10,000 at the bottom of a downturn. If its value rises to $12,000, the market has gained 20% and meets the common rule of thumb. If it later reaches $15,000 and drops back to $14,000, that is a smaller dip within the bull market. Investors usually call such a fall of around 10% a correction, not the end of the bull market.
Typical phases of a bull market
- Early phase. Prices start to recover while many investors are still cautious after the previous decline.
- Middle phase. Company profits improve, confidence grows and more people put money into shares.
- Late phase. Optimism can turn into excitement, valuations become stretched and prices sometimes rise faster than profits.
Bull vs bear market at a glance
Both terms describe the direction of the market over a longer period, not a single good or bad day. The main differences are these.
- Price direction. In a bull market prices rise over months or years. In a bear market they fall for a sustained period.
- Investor mood. A bull market brings optimism and willingness to take risk. A bear market brings fear and a preference for safer assets.
- Economic background. Bull markets often come with growing economies. Bear markets often accompany slowdowns or recessions, though not always.
- Main risk for you. In a bull market it is overconfidence and overpaying. In a bear market it is panic selling at low prices.
The words bull and bear are also used for people. A bull is an investor who expects prices to rise, while a bear expects them to fall.
Common mistakes in a bull market
Rising prices make investing feel easy, which is exactly when mistakes happen. Watch out for the following.
- Chasing recent winners. Buying something only because it has already risen a lot means you may pay a price that no longer reflects its value.
- Investing borrowed money. Loans multiply gains while prices rise, but they also multiply losses when the trend turns.
- Trying to sell at the very top. Nobody knows in advance when a bull market will end, so waiting for the perfect exit rarely works.
- Forgetting to rebalance. When shares grow faster than your other assets, your portfolio becomes riskier than you planned. Moving it back to your chosen mix from time to time keeps risk under control.
- Spending your emergency fund. Keep cash for unexpected costs outside the market, so you are never forced to sell during a downturn.
Frequently asked questions about bull markets
What is a bull market in simple terms?
A bull market is a longer period in which prices of shares or other assets keep rising. It is usually linked to a growing economy and confident investors. The name comes from the way a bull thrusts its horns upwards.
What is the difference between a bull and bear market?
A bull market means prices are rising over a sustained period, while a bear market means they are falling. The common rule of thumb for both is a move of about 20%. Investor mood also differs, with optimism in a bull market and fear in a bear market.
Is there an official bull market definition?
No, there is no official or legal definition. Most investors use the informal rule that a broad index has risen about 20% from its recent low. The exact start and end are usually only clear looking back.
How should you invest during a bull market?
Stick to a long-term plan, spread your money across different assets and invest regularly rather than all at once. Rebalance your portfolio when shares grow beyond your chosen share. Avoid borrowing to invest just because prices are rising.