To invest sensibly, it is extremely necessary to learn about the different periods of the stock market. This is because each period provides an opportunity to maximize your portfolio return. Understanding the overall attitude and behavior of investors in the stock market during bull, bear and recovery period helps you to make wise decisions. The most important thing is to understand the emotional changes going inside you and cope with the market accordingly. Your decision making should not be influenced by fear, greed, anxiety and other emotions. For this, you have to keep aside these emotions and make buying and selling decisions without interference.
Today, we discuss the bull and bear period of the market and the psychological orientation of investors during this period.
1) BULL PERIOD: Investors are attracted to the bull period like a moth is drawn to a light
” During the bull market, when the market grows on a daily basis, you are overconfident to invest more and more. This short term gain and easy money making make you feel like an invincible in a stock market. You will not hesitate to complement that the stock market is the easiest place to earn money.”
Investors always invest in the financial markets with the hope of profiting in the bull market. A bull market is a situation of a financial market where the prices of securities are rising consistently. The market shows an upward trend and if you can make an early entry, then you will profit in this period. During this phase, the market sentiment is very optimistic and the prices are expected to rise every trading hour. More investors are attracted to buy stocks in the bull phase. Many new investors mark their debut in the stock market. As a result, the demand for the stock is high while there is a low supply. The bull period is a period of excitement so it doesn’t last for a longer time frame.
” Greed dominates as logical reasoning are meaningless during the crazy bull period.”
So, basically what drives new investor is the greed to make easy money. Likewise, the fear of being left out of a possible gain in a shorter period also drives many to invest during this period. Since all your investments are justified by the daily price gain, you will not care about the company that exists behind the stock. The volatile market will drive you carefree to check the fundamentals of the company before investing. The INVISIBLE GORILLA comes into play as you tend to focus completely on price movement.
It is easy to enter the bull period. The major challenge of the bull market from an investor perspective is to know an exit point. When the market is on an upward trend, all you assume is that the price surge will continue. But after the market reaches the peak point, it is sure that the downward trend will follow. Once logic and reasoning are restored in the stock market, overvalued stocks will start to fall rapidly. Value investors and insiders will start unloading their shares. Those investors who enter in the ending phase of the bull market will be on the top of the suffering list.
So, it is extremely necessary to hold your head and not make random decisions during a bull period. Don’t be fully dependent on a friend or an investor while buying shares in a stock market. Look for knowledge, ideas, and information about the stock market and the listed companies prior to buying shares of any company. The best strategy in a bull market is to not buy shares of a much-overvalued company. Good stocks also become worse if you buy them at an overpriced rate because the returns they provide will not justify your investment.
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2) BEAR PERIOD: Both market and investors operate in a low mood during the bear period
” During the bear market, when the market falls on a daily basis, your excitement ceases. Now, if you are confident about your portfolio, then you can stick to them assuming that the market will rebound after a time period. But blind investors will find themselves in a limbo situation and pray for the magic to happen.”
A bear market is a situation of a financial market where the prices of securities are declining constantly. The market shows a downward trend and investors are pessimistic about the stock market. Many investors look to exit from the stock market in the bear period. As a result, the supply of shares is high while the demands are low. This eventually leads to a gradual decline in the stock price.
From the beginner’s perspective, it is hard to know an entry point in the falling market. This is because the market sentiment is driven by fear of losing more and more. When the market is in a downward trend, you assume that the market will continue to go down. The pessimistic market sentiment will incept the same inside your mind. So, only a rational investor can take advantage of the market sentiment.
The bear market has lots of opportunities for value investors and beginners too. You can purchase the shares of the company at a bargain price during this period. When most of the investors are looking to unload their shares, you need to be smart enough to grab this opportunity. For this, you need to identify the underpriced stocks in the market. Purchases that are made during the bear period will be of more value to you if you can choose the fundamentally sound company with strong growth potential. The market is sure to bounce back in the future. Likewise, valuable companies and their stock will also recover in the stock market. So, this is the right time for the new investors to load their portfolio with good stocks available at a cheap price.
The key takeaway from this article is to understand how the bull and bear market operates and how the market sentiments drive your investment decision. This will help you become a sensible investor who can take advantage of controlled emotions to cope with the market changes. You need to accept that highs and lows are part of the financial market. Both the bull and bear market do have opportunities. You need to use the available data and information to know the overvalued and undervalued stocks in the market.
To read the related article, click different phases of the market cycle.