HOW TO INTERPRET MARKET BEHAVIOR
Whether you are an existing investor who holds a portfolio of shares or a beginner trying to enter the market, it is important for you to understand how the market behaves and where it is heading. The overall market health has a direct impact on a company’s profitability and almost all shares are impacted by the market sentiment, to a certain extent. Therefore, in order to be successful in stock investing, you must at least know how to recognise the major market trends.
What is a bull market?
A bull market refers to a stock market that is on the rise. It is considered as a bull market when almost all stocks are appreciating in value for a considerable period of time, usually with a price gain of over 20%. You will know that it is a bull market when everyone seems to be talking about buying shares and nobody seems to want to sell. This is when you observe that the demand for the shares is very strong resulting in limited supply, which in turn, pushes the shares prices even higher as investors are competing for the shares. During a bull market, investors are confident that the uptrend will continue into a longer term and the overall economy outlook is favourable while the employment rate is high. This is the time when everyone is exhilarated about the stock market as their chances of losing money in such market is quite low.
A bull market refers to a stock market that is on the rise. It is considered as a bull market when almost all stocks are appreciating in value for a considerable period of time, usually with a price gain of over 20%. You will know that it is a bull market when everyone seems to be talking about buying shares and nobody seems to want to sell. This is when you observe that the demand for the shares is very strong resulting in limited supply, which in turn, pushes the shares prices even higher as investors are competing for the shares. During a bull market, investors are confident that the uptrend will continue into a longer term and the overall economy outlook is favourable while the employment rate is high. This is the time when everyone is exhilarated about the stock market as their chances of losing money in such market is quite low.
What is a bear market then?
A bear market is the total opposite of a bull market. It is characterised by a market that is downward trending with the stock value being depreciated by more than 20%. During a bear market, the demand for stocks is low while supply is high because everybody is trying to sell and only a few want to buy as the price continues to dip further. In such a market, the chances of losing money are high and therefore, you will see that the market sentiment is very pessimistic. A bear market is usually associated with weak economic outlook and the likelihood of declining company performance.
A bear market is the total opposite of a bull market. It is characterised by a market that is downward trending with the stock value being depreciated by more than 20%. During a bear market, the demand for stocks is low while supply is high because everybody is trying to sell and only a few want to buy as the price continues to dip further. In such a market, the chances of losing money are high and therefore, you will see that the market sentiment is very pessimistic. A bear market is usually associated with weak economic outlook and the likelihood of declining company performance.
A typical bull market usually starts at the bottom, when the economy seems to be weak, such as during a recession. Here, you can observe governments trying to take certain measures like lowering interest rates to boost their economic recovery. When the market liquidity eases and company borrowing cost is lower, company profitability will improve and this in turn will indicate a positive sign for a bullish market to start.
On the other hand, when the market seems to be very hot with widespread bullishness, especially when the economic growth rate is high, coupled with high inflation rate, usually these signs signify a market top. This would indicate that there is a potential end of a bull market and the beginning of a bear market. During this period, investors should pay more attention to bad corporate news and warning signs to prepare for the turn in cycle.
How do these markets affect investors?
Investor would ideally buy when the bull market is just about to start. This is when the stocks are still cheap and riding the bull wave until it reaches the top, before being sold as to maximise profit. Unfortunately, no one can be certain as to when the market is going to reach the top or the bottom. Therefore, by understanding how the market behaves, investors would have an idea on where the market is heading so that they can prepare themselves to take the necessary action. For example, an investor may not catch the stocks at the very bottom of the market, but at least he or she would know that the market is on its way to recovery and as such would start to pick up stocks with sound fundamentals but are still undervalue to invest in. Then, they would wait for the price to come up. Relatively, investing in a bull market is easier as the chances of making losses are low compared to investing in a bear market.
There are a few strategies that investors may take when dealing with a bear market.
- The most conservative way adopted would be to move out from stocks and invest in fixed income securities until the market recovers.
- Some would turn to the defensive stocks, such as those in the industries that are less affected by economic downturn, for example, food or utilities industries.
- The third option that is viable for investors is buying as the market continues to drop further to capitalize on the price reduction. However, investors who adopt this option face the risk of having their cash drying up all before the market reaches the bottom.What is most important for investors to take note of when making investing decisions is the need for homework; they need to do their homework properly, be it on the company itself or the overall economic situation. This is to ensure that their investment risk is minimised.
