1. Stocks Basics: Introduction
  2. Stocks Basics: What Are Stocks?
  3. Stocks Basics: Different Types Of Stocks
  4. Stocks Basics: How Stocks Trade
  5. Stocks Basics: Trading Stocks and Order Types
  6. Stocks Basics: Bulls, Bears & Market Sentiment
  7. Stocks Basics: How to Read A Stock Table/Quote
  8. Stocks Basics: Valuing Stocks
  9. Stocks Basics: Conclusion

Investors often have differing opinions about particular stocks or about the direction of the economy as a whole. Each trading day is analogous to a struggle between optimists and pessimists who buy and sell at various prices given different expectations. The stock market is said to incorporate all of the information that exists about the companies it represents, and that manifests itself as price. When optimists dominate, prices trend upwards, and we say that we are in a bull market. When the opposite is true, and prices trend lower, we are in a bear market.

A bull market is when everything in the economy is running objectively well: people are finding jobs and unemployment is low, the economy is growing as measured by gross domestic product (GDP), and stocks are rising. Picking stocks during a bull market is arguably easier because everything is going up. If a person is optimistic and believes that stocks will go up, he or she is called a bull and is said to have a bullish outlook. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. In fact, one severe form of a bull market is known as a bubble, where the upward trajectory of stock prices no longer conforms to fundamentals, and optimistic sentiment completely takes over. Historically, bubbles have occurred regularly dating back to the Dutch Tulipmania of the 1600’s – where the price of tulip bulbs rose so high that one could be worth more than a house – through to the housing bubble of 2008 that sparked the Great Recession. Bubbles always burst when reality catches up with overinflated prices, and people often realize bubbles in hindsight. It is difficult to recognize when investors are in a bubble and even harder to predict when it will pop.

A bear market is informally defined as a 20% drop in broad indices. Bear markets happen when the economy appears to be in or near recession, unemployment rises, corporate profits fall, and GDP contracts. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to profit from when stocks are falling via short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market.

Bear markets are typically associated with an increase in stock market volatility, since investors typically fear losses more than they appreciate gains at an emotional level. People are not always rational actors – especially when it comes to money and investments. During bear markets, prices do not drop in an orderly or rational way to some fundamental level of price-to-earnings, but rather market participants often overreact in panic and send prices below reasonable valuations.

When there is panic, there is fear. Irrational behavior can spread, and markets can collapse. Expectations about future cash flows essentially drop to zero and people become more concerned with converting investments into cash than future growth. Only when rational investing behavior is restored does a bear market turn a corner. It is also worth pointing out that bear markets can be great opportunities for long-term investors to buy stocks “on sale” at relatively low prices, which can actually boost overall returns over long time horizons.


Stocks Basics: How to Read A Stock Table/Quote
Related Articles
  1. Insights

    Digging Deeper Into Bull And Bear Markets

    Discover why it's important to know the characteristics of the two types of market conditions.
  2. Investing

    How To Adjust Your Portfolio In A Bear Or Bull Market

    While investors shouldn’t feel compelled to change their portfolios radically overnight in reaction to the market's daily moves, small adjustments in the face of a bull or bear market could be ...
  3. Trading

    Profiting In Bear And Bull Markets

    There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage.
  4. Trading

    Surviving Bear Country

    Stay calm, play dead and keep your eyes open for attractive valuations.
  5. Investing

    Prospering In The Next Bear Market: Here's How

    Prepare to survive, and even prosper, in the impending bear market, by considering and putting into action the following four strategies.
  6. Investing

    Adapt To A Bear Market

    Learn how your portfolio should evolve to suit bear market conditions.
  7. Investing

    Bear Funds: A Bullish Stance On Bad Times

    Even if the market is in a decline your portfolio doesn't have to be.
  8. Financial Advisor

    Preparing Your Clients for the Next Bear Market

    It has been almost six years since the last bear market, so it might be time for advisors to start preparing their clients for the inevitable downturn.
  9. Investing

    Don’t Panic When the Next Bear Market Happens

    Take advantage of the next bear market and watch your investment in great companies grow.
  10. Investing

    What Does the Bull Market Anniversary Mean to You?

    Bull and bear markets shouldn't really matter to long-term investors.
Frequently Asked Questions
  1. What is considered a healthy operating profit margin?

    Operating profit margin is one of the key profitability ratios that investors and analysts consider when evaluating a company. ...
  2. What is the difference between preference and ordinary shares?

    Preference shares, or preferred shares, have the advantage of a higher priority claim to the assets of a corporation in case ...
  3. What's the difference between "top-down" and "bottom-up" investing?

    Top-down investing looks at the economy and tries to forecast which industry will generate the best returns. A bottom-up ...
  4. Why is business ethics important?

    No matter the size, industry or level of profitability of an organization, business ethics are one of the most important ...
Trading Center