Bear Or Bull?
When you start looking at stocks and shares you will hear the expressions a 'bull market' or 'bear market'. This is not a reference to people investing in wild life, but terms to indicate the trend of the market.
What Is A Bear Market?
A bear market is when the overall trend of the market is downwards with prices of stocks and shares falling rapidly in a short period. The most generally accepted indicator of a bear market is when there is a downturn of 20% or more in the value of stocks and shares over at least two months and this downward trend needs to occur on at least one or more of the major market indicators like the Dow Jones Industrial Average (DJIA), the Japanese Nikkei or the British FTSE 100. Historically, it is more difficult to make money investing in stocks during a recession as it is hard to work out when the prices have reached flat bottom. However some investor 'bears' are temperamentally suited to this type of market and are able to manipulate their buying and selling to make a profit from the falling prices. This is usually done by 'selling short'.
Selling Short?
Selling short is when an investor first borrows a stock or share that they don't actually own and then sells it at a higher price. They are confident that they will be able to buy it later during the buying period of the exchange at a lower price. They will then return the stock to the lender and make a profit on the difference between the two prices. However, this type of buying and selling is only for the experienced investor. The opposite of this is buying long.
Buying Long?
Buying long is the normal way of buying and selling stocks and shares. You buy something now in the anticipation that the price will go up in the long term. The length of time you keep the stock varies depending on how quickly the market prices rise and whether you have bought the stocks for a long-term or short-term investment. For example, when you buy a house you are usually buying it to live in over the long-term. You don't expect to buy it and sell it again in a few months, even if the prices rise considerably in the meantime. However in the mid '80's in Britain, when there was a bull market, house prices were rising so rapidly that many people were buying and selling them without even moving in, making huge profits, only to get caught short when the 'housing bubble' burst.
Bull Market?
A bull market is when the overall trend of the investment market is upwards and the prices are rising faster than the historical average for that part of the investment cycle. As investors get more confident in the market, 'bulls' start to invest more and the cycle continues upwards. The danger of a bull market is when its investors lose their perspective and prices spiral out of control, bearing no relation to the real worth of the stock. Investors speculate wildly overvaluing stocks and shares and this becomes a 'stock market bubble' which can only burst, like the 'dot-com bubble' of the second half of the 1990's.