Have you heard the term bullish vs. bearish? If you watch investing news channels, or read investing publications, you will almost certainly hear people throw around the term “bear” and “bull”. Often, analysts will say something like “it’s a bear market” or a “bull market”. So why are animal terms being brought into the investing world? Because it’s an easy way to describe whether a market is “optimistic” (or likely to rise) or “pessimistic” (likely to sink).
The difference between bullish bearish is that bull markets refer to markets were confidence is high and asset prices are rising, while bearish markets are markets were confidence is low and asset prices are sinking. This describes the difference between bullish and bearish.
You can make money whether markets are bullish or bearish
That’s right, money can be made whether markets are bullish or bearish. You might not think that it’s possible to make money off of sinking markets, at least if you’re new to the investing world, but where prices are moving, there is a chance to make money. That’s how the world of finance works. At the end of the day, markets are really about price movements.
If you believe that a company, say Apple Inc, is going to sink, you can borrow Apple stocks from a brokerage firm and sell them. This is called short selling. The catch is that you have to repay the brokerage firm and you have to do so using Apple stocks. So if Apple stocks suddenly rise, you’ll have to pay more to repay the stocks.
Let’s say you buy 1,000 dollars worth of Apple stocks at $100 dollars a piece. That means you invested $100,000 dollars. Now, let’s say prices sky rocket to $150 dollars a piece. Apple just released a new product, for example, and it’s taking the world by storm, so now investors are excited.
You’re not on the hook for $100,000 dollars, the amount you initially used to buy stocks. You’re on the hook for 1,000 shares of Apple stock which now cost $150,000 dollars. This means you will have lost $50,000 dollars! In fact, short-selling is one of the few ways you can lose more than you invest. Let’s say shares rise to $300 dollars a piece. Now you’re on the hook for $300,000 dollars worth of shares. That’s far more than what you initially invested!
Where bears and bulls got their name
No one’s really sure where the names came from. Some say that bull markets come from the fact that bulls charge forward, and usually thrust their horns in the air to attack. Bears on the other hand, generally stand up, but then swipe down, or even lunge at the ground. It’s also interesting to note that once upon a time, bears and bulls were actually placed in pens and forced to fight each other for sport.
Another theory comes from bear fur trades. These traders, who gained the nickname “bears” would sell their bear skins before they even had them. More or less, these “bears” had a negative outlook on markets and wanted to get their cash before markets dropped. As a result, the term “bear” traders stuck. Meanwhile, bulls were always the opponents of bears in fights, so optimistic people started to be called bulls.
What To Do: Bullish vs. Bearish Markets
As you have almost certainly figured out, your investing strategy in bull markets, vs. bear markets is going to be very, very different. Markets will essentially be acting in opposite ways, and as a result, your strategy will be pretty much opposite during each type of market.
If it’s a bull market, than you need to charge forward like a bull and seize the opportunity. Expand your investments, consider leverage, free up a bit of capital to take riskier investments. Get at it! Bear markets are the time to buy, buy, buy!
If you’ve found yourself reaching a bear market, however, it’s time to sell before prices drop! Remember, when your goal when you buy stocks is to buy low, sell high, so make your sales as markets peak. If you’re very confident that it’s a bear market, than you can look into strategies like short selling, but remember, when you bet against markets, the risks are often much greater!