Whether you place your money in a bear or bull market could significantly influence how your stocks perform in the short term. But how about the long-term?
A bull market occurs when the stock market is gaining value, so the economy is expanding, while a bear market is in effect when the stock market is not performing well, so the economy is shrinking.
So when is the best time to invest your money?
There’s a steep drop in share prices during a bear market, and typically, stock investors exhibit low confidence in the stock and a perception that the market could be risky. On the other hand, investors exude more confidence in a bull market as stock prices steadily rise, giving the perception of a solid and stable economic environment.
In a bear market, individual stocks dip 20% or more from their recent highs, while during a bull market, these stocks increase 20% or more to reach record benchmark highs. You could say a bear market is the opposite of a bull market.
Stock market investing requires you to predict the market performance somewhat so that you can buy low and sell high.
What are Stocks?
Before investing in a bull or bear market, you need to know what stocks are and the market forces influencing their performance in the stock market.
Stocks, also called shares of stock or equities, are units you can own in a company. Buying stocks gives you partial company ownership and entitles you to certain benefits. Understanding how stocks work is the key to investing, as stocks play a crucial role in building a balanced investment portfolio.
While stocks give you an ownership stake in a company, it doesn’t entitle you to a say in the company’s day-to-day operations. But it entitles you to benefits including:
- Dividends: You receive a share of the company’s profits depend on its performance.
- Voting Rights: You may have the right to vote during the company’s annual shareholder meetings.
- Capital Appreciation: As the company’s stock prices go up, your share value also increases (and when the prices dip, your share value also drops)
There are two types of stocks: Common stocks and Preferred stocks. Each stock is equivalent to one vote during annual shareholder meetings. But the preferred shareholders are given preference over common shareholders when distributing dividends and liquidation, should a company go bankrupt.
How to Invest during a Bull vs Bear Market?
In a bull market, investors may sell part of their stocks for a quick profit or hold on to them, hoping the prices will rise even more soon. But in a bear market, investors are tempted to offset their stocks to minimize the risk of losing even more as the share prices drop.
Regardless of how your stocks are performing, refrain from reviewing your portfolio often to avoid the temptation to react to market fluctuations. Instead, you should invest for the long haul to study the general market trends over a period.
Your portfolio manager can also adjust (rebalance) your stocks where necessary to take care of market fluctuations during Bullish or Bearish markets.
Investing Tips: What You Need to Know About Stocks
Here is all you need to know about stocks and the investing tips involved.
1. Get familiar with Filings
U.S. Public companies and foreign companies make regular filings with the SEC, detailing everything from the finances to the potential conflicts and risk factors the company faces. Take note of acquisitions, senior management level changes, and stock transactions by board members or executives outlined in these regulatory filings.
2. Buy Low, Sell High
Buying stocks during a bear market can be a good investment, as stock prices may drop due to a temporary issue such as mismanagement. Hold on to these shares and sell them during a bull market to make a good profit.
3. Invest in the Long-term
Some of the best investors in the stock market have invested in poorly performing stocks during times of market stress, only to reap considerable gains when the industry dynamics align and the economic conditions improve. But your decision to invest should be well-informed by the annual filings by the companies.
4. A $100 Stock price isn’t Expensive; a $5 Stock Price isn’t Cheap.
The individual stock price is not the correct number to evaluate during decision-making. And it would be best if you researched the industry you want to invest in to predict the stock’s future performance.
For instance, blue-chip stocks will have a different price tag from green-chip stocks and will be influenced by different market dynamics.
5. Taxes can cut back on your profits
The tax man is always eyeing the one-year benchmark. Selling stocks, you have held for less than a year can trigger a short-term capital gain attracting taxes of anywhere between 25% to 39.6%. But if you hold the same stocks for at least 12 months, the tax rate drops to 15%, as it’s no longer taxed as ordinary income.
Stock prices rise in a bull market and decline in a bear market. Under bullish conditions, the stock market consistently gains value, even with a few market corrections. While under bearish conditions, the stock market is either losing value or holding steady at lower than average prices. The pointers below denote the two market conditions.
- Change in GDP
Bear markets are consistent with economic recessions and depressions, while bull markets are consistent with a rising GDP.
- Unemployment rate changes
In a bull market, there’s a declining unemployment rate, while in a bear market, there’s a rising unemployment rate.
- Inflation rates
In bull markets, high demand for products and services can cause prices to rise, while in bear markets, shrinking demand can trigger deflation.
- Prevailing interest rates
Low-interest rates typically denote bull markets, while high-interest rates are a feature of bear markets. Bull markets make it more affordable for companies to borrow money and grow, while bear markets tend to slow companies’ expansions.