Bullish vs. Bearish Investors: Which Are You?
After the March 2020 stock market crash brought on by the COVID-19 pandemic, the U.S. stock market saw immense gains. However, a recent NASDAQ correction and growth stock sell-off has made many investors think twice about continuing to add to the already high-priced growth sector of the market.
Others viewed the correction as a good time to buy and expect stock prices to continue going up in 2021. This present-day, real-world situation is a great example of bullish vs. bearish investors.
At a basic level, those who reacted to the correction by buying more while stocks are the bullish ones because they expect the stock value to keep trending upwards. Meanwhile, those who stayed out of the market during that time or sold off their stocks are the bearish investors.
Are You a Bull?
What does being bullish mean? If you have either a long or short-term positive sentiment towards equity, an index or the overall stock market, you can be considered a bullish investor. For example, if you’re bullish on Amazon because their earnings went up in the last quarter, that means you would expect Amazon’s stock value to go up and might even buy more shares.
Even if you don’t think the stock market will do well, you can be bullish in other areas. For example, you may be bullish on gold because you anticipate the stock market will dip and inflation will rise in the coming years, making gold desirable as a store of value.
The term bullish has also commonly been used to talk about the stock itself. A stock can be bullish if the sentiment towards it is generally positive or if it has been rising in value for a period of time. A stock can typically become bullish due to news, deals or increased earnings. You’ll sometimes hear the phrase “making bullish moves” when referring to a stock that has been climbing.
Or Are You a Bear?
Certainly, we’re not thinking of the animal here. In investing terms, you’re a bear if you think the value of either the total market, specific equities or certain sectors will fall. In short, it’s the opposite of being bullish. Like those who are bullish on stocks or equities, you can be equally bearish on just one stock or one security, such as a company like Amazon or equity like gold.
If many people are bearish on equity, it can cause its value to drop. The opposite happens, of course, when many people are bullish on one stock.
When investors are extremely bearish on a stock, they might short sell the stock, meaning they will borrow shares of stock to sell in hopes of buying it back later at a lower price. In the case of company bankruptcy, they will never have to buy it back. However, this is only recommended for the most experienced of investors as the potential losses here are infinite.
Bullish vs. Bearish Market
As with investors and stocks, a market can also be bullish or bearish. A bull market is generally defined as a period of consistent, overall upticks in the market, whereas a bear market is when the prices of the overall market fall.
The most commonly accepted metric for determining a bear market is a 20% fall from a recent peak, but there is no universal or official measurement for a bull market. However, a common assumption is a 20% rise in the prices of the stock market.
For the past decade or so, the U.S. stock market has been described as being an amazing bull market that’s paralleled the expansion of the U.S. economy. However, economic expansion isn’t necessarily a prerequisite for a bull market or a recession for there to be a bear market. Bear and bull markets can be cyclical, not always lasting for years at a time, and can actually be mere weeks or months in length.
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A bear market is also not to be confused with a correction. A correction is typically much shorter in duration and often a smaller dip, such as the recent 10% NASDAQ correction. These corrections also generally affect smaller sections of the market.
Origin of the Terms “Bull” and “Bear”
It is said that the term “bear” came first in investing and “bull” came afterward to act as a counter. Regardless of which one came first, the terms bull and bear came to be from the two ways the respective animals attack. A bull will charge forward and rear its horns up while a bear will swipe its paw down — attack directions that are parallel to investors’ anticipation of the market direction.
There are quite a few other interpretations too. Researchers have had theories ranging from 18th-century bearskin trading to bull- and bear-baiting.
People who start investing during bull markets can fall victim to the fear of missing out on stock buys that were hyped by the news. Always use rational, factual judgment and not emotions when investing. Invest safely and regularly with enough diversification in your assets.
Investing in a Bear Market
Most often, if your timeline for investing is long in that you won’t need the money for many years, it hurts more to stay out of the market than to intelligently invest. There are quite a few reliable ways you can still invest and make money in the market when there is a clear bear market:
Consider the Following:
- Most likely, not all the sectors are in a free fall. There are typically still some stocks or sectors that are on the rise. If not, there are likely at least some holding steady and still paying dividends to shareholders.
- Use the dollar-cost averaging strategy instead of putting in a lump sum all at once. With DCA, you can put in smaller amounts of money at regular intervals. This makes sure your cost of investing averages out over time since some of your money will go into the market at peaks and some will go in at dips instead. As a result, you don’t have to risk all of your investable money at once while the market continues a downward trend. In fact, this is a sensible way to invest in a bull market as well.
- If you understand options investing, buy short and long-term puts to hedge against falls. Puts give you the right to sell your stock at a set price at the time of purchase. If the stock goes down from the time you buy a put, you would still be able to sell at the price you set earlier.
- Invest in gold, silver, bonds or even cryptocurrencies instead. Find an asset, outside of stock, that you trust and that is still rising, staying steady or is a good store of value. It is sometimes the case that bond yields rise when the stock market is falling.
Regardless of whether you are a bull or a bear and whether the market is going up or down, always invest based on facts and numbers, do thorough research and have a plan before you invest. If you need help with financial planning, consult a financial advisor, even if it is during a remarkable bull market.