Don’t worry you are still reading the Business Observer. The terms ‘Bulls’ and ‘Bears’ are used in the financial industry to describe the market.

Let’s break it down.

THE BULLS

A bull market is a duration of generally rising prices, where the market is showing confidence. The market indices such as the NASDAQ, FTSE and Dow Jones go up as well. The number of shares traded is also high, and even the number of companies entering the stock market show that the market is confident. Therefore, these are bullish characteristics.

Technically, though, a bull market is a rise in value of the market of at least 20 per cent. The huge rise of the Dow and NASDAQ during the tech boom is a good example of a bull market.

THE BEARS

A bear market is the opposite to a bull; this is where the markets fall by more than 20 per cent. A bear market is a market showing a lack of confidence. Prices hover at the same price then go down; indices fall too and volumes are decreasing or stagnant. The bear market essentially becomes a waiting game as people wait for the bulls to start driving the prices up again.

However, I will go as far to say that a bear is nothing more than a very tentative bull or a bull that is asleep.

HOW DID THE TERMS ORIGINATE?

The origins of the terms “bull” and “bear” are unclear, but the most common explanation is from the way in which each animal attacks its victims.

It is in the nature of the bull to drive its horns up into the air, while a bear, on the other hand, like the market that bears its name, will swipe its paws downward upon its prey.

WHAT TO DO?

In a bull market, investors will take advantage of rising prices by buying early in the trend and then selling them when they have reached their peak. Of course, the key is to determine exactly when to enter and exit.

When investors have a tendency to believe that the market will rise (thus being

bullish), they are more likely to make profits in a bull market. As prices are on the rise, any losses should be minor and temporary. During the bull market, an investor can actively and confidently invest in more equity with a higher probability of making a return.

However, in a bear market, the chance of losses is greater because prices continually lose value and the end is never set in stone.

Investors who do decide to invest with the hope of an upturn are likely to take a loss before any turnaround occurs. Thus most of the profitability will be found in safer investments such as fixed-income securities.

An investor may also turn to defensive stocks whose performances are only minimally affected by changing trends in the market and are therefore stable in both economic cycles.

WHERE ARE WE NOW?

The triggers for one market versus the other may differ from time to time. For example, in the 1970s there was a global recession with high inflation; then in 2000 the dotcom bubble — largely due to overvaluations; and then, of course, there was the 2007-2008 banking sector collapse.

One thing the economy has taught us over the years is that markets do not follow a strict set of rules. In this world a+b may not always equal c. Even if the circumstances seem obvious in hindsight, it is seldom possible that the bull market is coming to an end and the bear market is approaching.

There is no sure way to predict market trends, so investors should invest their money based on the quality of the investments. Both the bear and the bull markets will have a large influence over your investments, so take the time to determine what the market is doing when you are making an investment decision. Remember, though, in the long term the market has posted a positive return.

Kelley Reid is an Asset Manager at SSL.