The Difference Between a Bear and Bull Market – and the Impact on Your Finances

This article is sponsored by eToro.

Investing is an inherently risky activity. However, if you’ve got an understanding of how different factors can impact your shares, you’ll be able to make informed decisions before diving in.

Two of the most commonly used terms that come up when discussing the stock market are the ‘bear’ and ‘bull’ markets.

According to eToro‘s Market Analyst Josh Gilbert, a ‘bear’ market is used to describe when shares are falling, usually over a prolonged period and when an asset has decreased in value by around 20%.

On the other hand, a ‘bull’ market refers to when shares increase in value over time. Usually, this occurs if an asset class continues to rise over several months and would be classed as bullish.

It’s integral that first-time investors get a grip on how to navigate these occurrences, as it could mean success or disappointment for their investments.

Is it safe to invest in a bear market?

Considering a bear market refers to when shares are falling, there are a few things to consider when investing during these periods.

According to Josh, investing in a bear market can be tricky, but that shouldn’t turn off first-time investors from starting their journey.

“People often use bear markets to invest as you can find shares at a more attractive price than in a bull market. It may be a great opportunity for first-time investors to buy shares at a low price, but knowing the risks are key,” said Josh.

“As mentioned above, bearish markets are usually used over prolonged periods of times, so adopting a dollar-cost average strategy in a bear market would be a good idea.”

Dollar-cost averaging refers to a strategy which refers to investing smaller, fixed amounts regularly over an extended period of time, rather than investing all capital in one go. This strategy is easy for beginners to pick up on services like eToro.

“A market would often be called bearish after a 20% drop, and in March, US indices such as the Nasdaq lost more than 35%. However, since the low, the market has recovered by more than 75%. If you are starting your investment journey, you wouldn’t have been affected by the market downturn in the bear market, so it poses a great opportunity to invest in the market,” he explained further.

We are currently in a bull market – how long will that last? 

Josh noted that we’re currently experiencing a bull market, which tends to last longer than bear markets historically. However, the COVID-19 pandemic has undeniably impacted the course of its growth.

“A worldwide vaccine will hopefully be introduced, and a stimulus package in the US to stabilise the economy is likely to buoy the market. This could allow us to see the bull market continue into the start of the year,” said Josh, in explaining how COVID will continue to influence the market.

“A global supply of a vaccine could be slow, which could cause more economic problems for global business if restrictions till continue throughout 2021.”

What factors determine growth in a bull market?  

According to Josh, one of the most important factors that determine a bull market is demand. Typically in a bull market, more investors are looking to buy shares, rather than sell them, which increases the demand.

“Corporate earnings are also a big factor. If large corporations are reported record revenues and profits, it usually indicates a bull market and share prices are likely to rise on the back of this,” when explaining how a bull market is determined.

“We can often look towards IPOs as a bull market. Companies will only want to list if they believe their share price will increase over time. Since September we have seen a flurry of IPOs which again resonates the face we are in a bull market.”