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Most investors will have heard the term bull or bear market being thrown around at some point. Whilst they are terms that have entered everyday language, it is important to grasp a clear understanding of what they mean.
A Bear Market is used to describe a market in which there is increasing investor pessimism. There can be a wide range of contributing factors however common characteristics are low investment levels and falling share prices. The nature of a bear market is also cyclical with falling share prices and decreased spending on investment often leading to greater pessimism and so on.
A technical guide for labelling a bear market is when there is a market dip of 20% or more from the 52-week high.
A bull market is the opposite of a bear market and represents positive investor sentiment. During a bull market investors are confident, share prices are rising, unemployment is low and the economy is strong. Similarly, a technical guide to help define a bull market is when the market has risen 20% above the 52-week high.
The term bears and bulls is not only reserved for market descriptions but is often used to characterise investors. A ‘bear’ investor is one who sells his shares under the impression that the market is about to dip. Whereas a ‘bull’ investor is again the opposite, an investor who buys shares as they believe market prices are about to increase.
Both terms can be defined in relation to significant fall in share prices. However, a market correction is usually the result of a temporary price dip before the market readjusts itself. Whilst a bear market stems from negative investor sentiment and is not usually as temporary.
As a rule of thumb a 10-20% decrease in market prices can be considered a market correction whilst a fall greater than 20% can be considered a bear market.
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