Investing 101: Defining Bear and Bull Markets and Recession

by Hank

A lot of Servicemembers and even regular civilians are not as well versed in some of the concepts, terms, financial products, and options used throughout the investing world. But, everyone should have a basic understanding of the financial markets because they affect all of us. Like freshman year of college, everyone should have an introductory level of knowledge and understanding about the stock market, investments, mutual funds, insurance, etc….an “Investing 101″ level of knowledge.

Long and Short. Many investors use the terms long and short to define what kind of investor they are or where they believe a stock or the market is headed. Being “Long” is when you are investing in the hope that the stock market will rise in price. This is what most investors are. Being “Short”, like a short seller, is the opposite and invests thinking that a stock price will decline.

Bull and Bear Markets. For centuries, stock markets around the world have been called bull and bear markets. Bulls or bullish investors that think stock prices will rise and that things in the market will get better. This is a lot like being long in the market as well. The upward market is called a bull because bulls swing their horns upward to strike. Bears or a bearish investors have a negative outlook on a specific stock, industry, or the entire stock market. The financial situation that the U.S. economy is currently in is a classic bear market. A bear market is technically defined as a broad market index such as the S&P 500 index declining by 20%. There have been recent bear markets in 1987, 1990, and 2000. An investor can be bullish on the total stock market while still being a bear on certain industries. I am personally bullish on the stock market improving over the long term, but I am bearish on any airline stock and the entire automobile industry for example. I think that they both have horrible unions that are strangling companies in those industries. A down market is called a bear market because bears strike things down with their claws in a downward motion.

Recession. There is always a great debate as to whether the U.S. economy is actually in a recession or headed towards a recession. There is so much negative connotation surrounding the term that many politicians, economists, and other professionals are leery of even saying the word out loud. But, what is a recession? It all depends on how you look at it and define the term. With the financial markets’ currently turmoil, you might say that it is a “no brainer”. But, not so fast! Technically, a recession is defined as two consecutives quarters of declining Gross Domestic Product (GDP), which is the market value of all goods and services produced by a country. We have not actually had that yet. The GDP of the United States has actually increased 0.9% in the first quarter and 1.9% in the second quarter of this year. To make matters worse, the data provided by government economists lags the economy which is why we do not have more current figures. So, we actually won’t official know if we are in a recession until it is halfway over. But, this is just semantics. Many scholars and practitioners think that the definition is outdated. Many believe that a recession in the United States really started in about November 2007, and most ordinary citizens agree when their wallets are chronically lighter like they have been these past few months.

Over the coming weeks, I’ll continue to talk about classic finance terms and concepts. Next week, I’ll delve into risk versus reward and your risk tolerance. Do you have any investing or money terms that you would like to see discussed here? Let me know by going to the contact page and send me an e-mail.

If you enjoyed this posting, you might also like these:
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