Friday, April 29, 2016

Investment Basics: 'Bear'ly Making Sense of a Bull Market

As a beginning investor, sometimes you can listen to the news or hear market re-caps, and be utterly confused by the lingo. You may have heard reference in the past to the concept of a 'bear' or a 'bull' market. Even outside the New York Stock Exchange, they have a statue of this lovely beauty:

Looks friendly.

So what is the difference between a bull market and a bear market and how did they get those names?

Interestingly, the difference between the two boils down to their method of aggression or attack. A bear when poised to attack takes it's paw and swipes downward. For bulls, it's exactly the opposite. Think Pamplona and the running of the bulls for a minute. Bulls will move their heads low and thrust quickly upwards, hoping to skewer unsuspecting runners with their horns. So what does this have to do with the market? Both animals' attacks are supposed to symbolize the movement of the market and investor confidence (more about that in a moment). In a bear market, you would expect to see market prices decline, while in a bull market, the opposite would be seen. Some investment experts cite a 20% decrease in value from the peak of the bull stock market as the sign of the bear market. 

The animal choices are also not completely random. Some of the first commodity traders were bear skin sellers. After selling orders of bear skins, the traders would hope that the price would go down on the skins before they purchased them. They would still charge their customers the same cost, thus making a larger profit. They would actually hope for a 'bear' market and would use that to turn a profit.

Investor Confidence
As seasoned stock market watchers know, much of the stock market movement is tied to what is referred to as Investor Confidence. Investor Confidence can make or break a stock. The stock market often has normal shifts up and down, as individual stocks also move up and down. Certain stock groupings, such as the NASDAQ or the S&P500 are groupings of stock that are than measured in their market increases and decreases. These indices are generally thought to be good representations of tracking the market as whole. If overall, investors are less hopeful about the future of the US economy the stock market tends to take a hit. If a company projects positive earnings or makes a change in leadership, this may increase investor confidence and cause a rise in pricing.
Larger impacts, like consumer spending, reports from the Federal Reserve or the unemployment rate are all items closely watched by investment firms and factor into decisions to buy or sell. CNN Money has a different way of talking about Investor Confidence. They have a model related to Fear V. Greed. On the Greed side, investors are purchasing rapidly and the overall stock market sees a rise (bull market). The Fear side, is when many investors question the values of their stocks and sell rapidly (bear market). For many of us, the sell-offs of the Great Recession are not yet distant memories, where many portfolios lost tens of thousands of dollars in short periods of time- a reminder that fear and lack of confidence has large repercussions. 
  What a load of bull...
Does the idea of investor confidence and the rise and fall of the market seem arbitrary to you?? I'm with you! You can go crazy watching the major indices, like the NASDAQ or the S&P. Most agree that the US Stock market has been in a long-stretch of bull market, without a 20% decline that has been seen in the global markets. While global stock markets have entered the bear market- US markets seem to still be in bull territory. Watch any Market Watch though and there are predictions of doom and gloom on the horizon. But would a bear market be so bad?
Think of a weak stock market as a 'sale' rack - with deals to be found for the savvy investor. I am always thrilled when I purchase something half-off or on clearance so why shouldn't I also be stoked by the idea of paying less for a stock that one year ago was twice the price? This is where that weak stock market- or a bear market, can be good for you! You have the chance to build your portfolio without spending as much, if you are making good investment decisions. For me- we have a monthly amount that we put into a ROTH investment account- we put the same amount in each month, but our money stretches farther in a bear market, than a bull market. When eventually the market turns from Fear to Greed again, the hope is that those investments will increase dramatically!
How Confident are YOU in the Market? Do You Think A Bear or Bull Market is in the Future?

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