Tuesday, November 16, 2010

What’s the Difference between a Bull Market and a Bear Market?

You may have heard the terms Bull Market and Bull Market and wondered what they mean.

The stock market goes up and down all the time in little amounts and sometimes in big ones, but then it will go in the other direction for awhile. This is why the stock market is considered a risk when investing. Say you buy your bike today but it goes on sale tomorrow. That would be an example of what can happen in the stock market. Of course, you could also buy your bike on sale and pay less than someone who buys a bike a few days later when the sale is over. You can read about how the value of stocks change in our earlier post, How much do stocks cost?

But, sometimes the stock market goes in one direction, either up or down, pretty consistently for a few months. If the stock market goes up by 20% for two or more months, it is said to be a Bull Market. Most investors are excited about Bull Markets because it means that the value of their investments is going up. This is like you buying your bike and being able to sell it to your neighbor later for more than you paid for it.

If the stock market goes down by 20% for two or more months, that is called a Bear Market. The most famous Bear Market was the Great Depression in the 1930s. Most investors believe we are in a Bear Market right now because we are in a recession, and unemployment is high. You may have heard about this on the news or from your parents. Some people like Bear Markets because they can buy things at a low price and then wait for them to go up in a Bull Market.

Doesn’t it make sense to buy something when it is cheaper and then sell it when it is worth more? Things like bikes, tend to go down in value (you will probably have to sell it for less than you paid for it), but some things, like rare baseball cards or other collectible items can go up in value as time goes by. The problem with the stock market is that nobody knows when the value of stocks (or bonds) will go up or down.

This is why it is a risk. The best way to invest in the stock market is to invest for the long-term, for many decades instead of many years. That way you go through a lot of Bear and Bull markets before you sell your stocks.

The market goes up and down for a lot of reasons. We covered some of these in an earlier post. What causes the stock market to go up and down?

There are many theories about why the terms Bear and Bull are used. One of the most popular is that Bears rise up above their prey and come down, while Bulls use their horns to thrust up.