Navigating Bull and Bear Markets: Key Differences Explained
Bull and Bear are the two most popular and oldest ways to describe the general trend of the stock market over a period of time. They can refer to the overall stock market or a specific part (usually called sectors) like tech or oil. Check out this overview to help you understand how these symbols can impact your investments or investment strategy.
What is the difference between Bull and Bear Markets?
While it’s unknown why bear and bull were specifically chosen, these terms have been used to describe stock markets since the 18th Century. Wall Street has a large iron statue of a bull representing the goal of market growth (there are no bear statues).
- A Bull market means the stock market is growing in value.
- They are seen as positive and healthy.
- They can last for several years.
- They are the most common type of market, meaning the market generally grows over time.
- A Bear market means the stock market is dropping in value.
- They are seen as a cause of concern.
- They are less frequent, lasting a few months to a few years.
- Officially they describe a market that has lost 20% of its value in a short period of time.
An easy way to remember which does which is to think of how the animal attacks an enemy. Bull’s horns swing up, and bear’s claws swing down. Bull markets swing up in price, and bear markets swing down in price.
What are Indexes?
In addition to bull and bear markets, there are some financial terms that may seem confusing. For example, indexes. Indexes are a collection of companies grouped together and tracked to make generalizations about the stock market as a whole. If a popular index is doing poorly, it could be a sign of the economy doing poorly overall. These indexes often use the largest and best performing companies to evaluate the stock market.
The most popular indexes are:
- The S&P 500 (Standards and Poor 500): The S&P 500 takes the 500 highest performing stocks to create its index. The larger the stock, the more influence or weight it has. This is one of the most carefully watched indexes to understand and predict the overall market health.
- The Dow (Dow Jones Industrial Average): This is an index of 30 prominent companies selected by a committee that has three representatives from the S&P and two from The Wall Street Journal. Because it only examines 30 companies, it tends to be less reliable to measure the overall performance of the market, but can be better at predicting how individual portfolios are doing if they line up with the 30 companies The Dow specifically examines.
- The NASDAQ (National Association of Securities Dealers Automated Quotations): The NASDAQ consists of over 3,300 different companies and is heavily weighted toward information technology and has seen rapid growth over the past 40 years becoming a major representative of market growth.
Understanding the terms above can help you understand some common financial concepts and make you a more informed investor.