Bullish and Bear markets are used to describe stock market conditions. These two terms determine how the stock markets are performing, in that whether they are increasing or decreasing in value.
All stock market investors and traders need to understand how the markets perform in each of these conditions and how that impacts their commodities and portfolios respectively.
A Bear Market vs. a Bull Market
A Bear market is a market in which the commodities are decreasing. Any market is only categorized as a bear market once it has fallen a total of 20% or more in value after it has experienced a high recently.
Typically in the instance of a bear market, the value will continue to drop. This causes what is known as a downward trend. Subsequently, investors then form an opinion that it will continue to drop and this then forces the downward trend even further.
In a bear market condition companies can be seen placing their staff on furlough and the unemployment figure will be on the uprise. In this market condition, investors are wanting to sell as opposed to buying. The market demand will be lower than the supply and the prices will naturally decrease and drop.
In contrast, a bull market is on the incline and the market is currently experiencing economically favorable conditions. A bear market is prevalent in an economic climate where stock value is dropping and the economy itself is receding.
Financial markets are affected by the attitudes and opinions of investors. These terms also dictate how they feel about the market in general and this then perpetuates what is known as an upward trend.
The bull market scenario is maintained when there is a constant increase in the value of the commodities in question. It is the opinion and attitude of the investors that these prices will continue to appreciate in value and will continue to do so over an extended period of time.
This means that the country’s economy is prospering and that there are high levels of employment experienced at that point in time.
In a bullish market scenario, there will be a short supply of securities and an increased demand. Therefore many investors will want to buy equity as opposed to selling them. This will result in the share prices increasing and investors competing for prices to purchase more securities or commodities.
Short Selling of the Stock Market
Shorting stock or short selling is a very common and popular method of trading for any person who is willing to bet on a huge risk of losing capital.
Short selling implies the employ of a trading or investment strategy that predicts that a commodity or stock’s price is going to drop. This is a complicated strategy and only the most seasoned investors and traders will make use of it, due to the advanced techniques associated with it.
Some characteristics of a short-selling instance are when the trader has borrowed a commodity and has sold it on the stock market, in the hopes of buying it back at a later stage, but for less than what they have initially paid for it.
This advanced strategy has a very high reward but also a very high-risk component, in that big
gains can be experienced but the losses can come quick and fast too without warning at any time.
Investors and traders alike might choose to employ short selling as a speculative trading technique, or as a hedging tactic to mitigate risk in a long position. A long position refers to an instance whereby the investor has chosen to invest in a security or equity for an extended period of time.
Speculative trading is coupled with a significant amount of risk, whereby a hedge is a more commonly used transaction to reduce risk.
An investor or trader will open a short-selling position by borrowing a security they believe will drop in value by its date of expiration. They will then flog the borrowed stock to other buyers that will be willing to pay the price at that time.
It is the hopes of the person that borrowed the security that the price thereof will continuously drop so that they can then buy them at the reduced price. Unfortunately, the risk attached to losses is unlimited due to there being no limit to the price increase.
The Pros and Cons of Short Selling
- There is a possibility for high gains to be experienced.
- There is very little capital required to start investing in this type of strategy.
- This strategy can act as a hedge against other holdings.
- The possibility of leveraged investments exist.
- A trader or investor needs to be in possession of a margin account to trade.
- There will be margin interest incurred for every transaction.
- The potential losses are unlimited to the price increase being limitless.
The Added Risks of the Short Selling Strategy
- This strategy makes use of borrowed securities.
- There is an added risk of the price of a stock taking long to decline, which poses a risk to the borrower in that they won’t be able to pay back the borrowed security without suffering a major loss.
- There is a possibility that the trend might turn and that it can be turned over into a price increase.
- There is a change of a regulatory body changing its regulations at any point in time.
Shorting stock is better employed during a declining bear market as opposed to a strong bullish market condition.
Short selling is completely different from the standard practice of what we know as stock investing and trading. There is a regulation that prohibits shorting a stock from further declining when it has dropped by 10% or more on the same day in comparison to the day before closing price.
In summary, the losses that can be experienced is limited less and this is a tactic best left for the more experienced investors and traders who have had dealings with this tactic in the past and know how to mitigate it.
Disclaimer: The Content is an opinion and is for information purposes only. It is not intended to be investment or financial advice nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or any other assets. Seek a duly licensed professional for investment or financial advice.
I am an Expert Financial Writer with a passion for the global capital markets.