What is a bull market? What is a bear market? How can you profit from each?

Things are always looking up in a bull market just like the horns of a bull when it’s about to charge. In market terms it is an identifiable sector of financial securities where the overall prices are going up and are expected to continue on the upward trend. The terms “bull” and “bear” market are commonly used when talking about the stock markets. But really they can refer to any market where financial products are traded, such as bonds, forex, futures and commodities.

The overriding bull market sentiment is investor optimism and confidence where people expect the good times to keep on rolling. Of course markets like life go in waves and the key skill for long-term market success is to be able to predict the turning points. It isn’t a logical rational situation but rather a psychological one where the mob mentality rules.

Everybody makes money in a bull market. Buying (especially bargain stocks) and holding will see earnings per share grow as well as capital value. Dealing becomes all about fundamental ratio analysis. Looking for strong, well managed, new companies.

The bear market is the antithesis of the bull market. The bears’ paws swing downwards when things are going badly. If the trend is down, it’s a bear market. It becomes a vicious circle as investors expect losses in a bear market and selling pressure continues while pessimism grows. The measure is a drop of 20% plus in many of the broad market indices, such as the Dow Jones average or the S&P 500 over a two-month period.

A bear market can easily be mistaken for a temporary market correction. This is a short-term downward general movement that lasts less than two months. These points are great opportunities for picking up a bargain stock but get it wrong and a, bear market can wipe you out. Timing buys at the low point is an extremely risky thing to do. The only real way to make large profits in a bear market is to be a short seller.

Short selling of stocks and options involves selling with a commitment to buy a date shortly in the future. Clearly the belief is that the price drops will go on and inverse profit can be made. The short seller will not hold the stock and has to buy, or pay penalties, the stock after a short length of time when the stock will hopefully have dropped in price.

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