Understanding How Bear and Bull Markets Works

Every market worldwide is characterized by uptrends and downtrends. The stock market is no exception, as brokers, traders and investors often have to understand the market patterns before making financial decisions. 

The Nigerian stock market, like every other stock market in the world, exhibits two major trends, the bearish, and the bullish trend. These trends result from key events that have occurred in the country’s economy that may influence market participant’s view of the stocks listed on the exchange(s).

As a broker, trader or investor, the amount of profit you will make from trading shares and stock may depend on your understanding of the various trends, including the bearish and bullish trends. Other market trends don’t usually have as much influence on stock indices as these two.

Bullish and Bearish trends

To begin with, what is a bullish trend? A market is said to be bullish when the price of commodities is consistently increasing over a while. This increase excludes short-term price spikes, as these are not sufficient markers to identify a bullish market at a particular time. 

At such periods, participants in the market hold on to their respective stocks and may even buy more, hoping that the prices increase. Then, they will make a profit from the sales. Bullish trends don’t last forever but usually occur at the end of a very long or severe dip in the economy.

On the other hand, a bearish trend is a market trend characterized by a drop in prices of already held stock. Here, the traders tend to sell their stock to prevent losses due to the price reduction. A bearish trend usually profits only a limited section of the stock market when it occurs. 

As with bullish markets, short-term reductions in prices should not be mistaken for a bearish tendency. This is why you must have a financial advisor who will advise you on when to buy, sell, or hold your stock so that you don’t make your financial decisions based on emotions.

How to Profit from Bullish and Bearish Markets

A good question now will be, how then would you profit from these trends? For a bullish trend, it’s quite easy to understand; hold your stock, and even buy more if you can. When the prices go up, you can sell your stock and profit from the resultant sales. You could also employ other strategies to maximize the profit made from bullish trends. One of such strategies is the call option. 

The call option is an order placed on stock such that you can only buy such stock at a particular price, called a strike price, till a stated date. Even with an increase in the price of that stock, you would be able to buy the stock at your quoted strike price. The call option is maintained by paying a premium. When the stock price increases above the strike price, you can profit from selling the call option or selling the stock at the floor price.

Making a profit from the bearish trend is also quite as straightforward. You could borrow stock and sell when you notice a bearish trend is coming. Then, when the stock price drops, you buy back the stock, book some profits and return the initially borrowed stock. This way, you have made a profit from the trend. This is what market players refer to as short trading.

Another way to profit from the bearish trend is by purchasing the put option. The put option enables you to keep selling the stock at a particular price during a bearish trend till a specific date. Once the floor price is lesser than the strike price, you can choose to keep selling at the strike price or sell the put option.

In summary, while trading on the stock market, basic knowledge of important trends is key. Also, getting a financial advisor is recommended to aid your decision-making and avoid losses. The financial advisor will also help you identify the trends beforehand so you can plan in line for them.

We Can Help 

Cordros Capital is happy to help you make informed and research-driven financial decisions. We are a leading financial services group, offering fund management services, insurance brokerage, financial advisory, amongst many others.  

Our Research and Strategy division provides unique, deep insights and analysis for clients in the equity, fixed income, currency and money markets, with the objective of offering you quality advice and making smart investment decisions. Reach out to us today and give us a call on 07002673767 or email at [email protected].