No matter what the economy is, you will often hear the terms ‘bear’ and ‘bull’ market being thrown around. You might watch CNBC and hear a financial professional talking about the latest bear market and wonder what exactly that means. What is the difference between a bear and a bull market?
A bear market is a decline in a market. A bear market is most often referred to with the stock market. If the markets have been declining over a long term time period, which can be months or longer, the markets are acting bearish. This is usually determined by looking at how an index is doing such as the DJIA or the S&P 500. For example, if the S&P 500 has been down 15% for the past year, it would be considered a bear market.
A bull market is just the opposite. A bull market is when the stock market has been increasing faster than the average. Again, indexes are usually used as a benchmark to determine a bull market. If the historical average return for an index is 12% and for the last year or so it has been 16%, then it is a bull market.
What causes a bull or bear market? These markets fluctuate with the economy. If the economy is doing poorly and there is a recession, the markets are bearish and will go down with it. If the economy is doing especially well and these businesses are booming, a bull market will result.
When you see that there is a bull market, you may be tempted to think that this is the best time to invest. This isn't necessarily the case. We could be at the peak of a bull market and you wouldn't know it. You might see all the prices shooting up so you buy a lot of stock. If it's the peak, it may soon begin to drop and you lose money, or it will stay the same and you won't make much. The same goes for the bear market. You may invest in the bear market because it looks low and can only go up from there, but it could keep going lower.
The best time to invest in the stock market is when the economy is coming out of a recession. This is when all the prices start to increase. You will never know for sure what the market is doing. The best thing you can do is invest consistently over time and concentrate more when entering a bull market and less when entering a bear market.
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