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Bull and Bear Markets: Breaking Down the Differences

There’s no way you have not heard the terms “bull” and “bear” when it comes to investing. These terms are always used to describe market conditions. Because the direction of the market is a major force affecting your portfolio, it’s important that you know exactly what the terms mean and how each affects you. This article will break down the bull and bear markets and what separates the two.

What Are Bull and Bear Markets?

The terms “bull” and “bear” market is used to describe how stocks are generally doing in the market, whether their value is appreciating or depreciating. At once, because the market depends on investors’ attitudes, these terms also mean how investors feel about the market and the following trends.

It’s important to remember that a bull market is characterized by a general sense of optimism and positive growth which tends to catalyze greed. A bear market is associated with a sense of decline which tends to instill fear in the hearts of stockholders.

bull and bear markets differences infographic

History of “Bull” and “Bear” Terms

Bull and Bear animal

Historically, the bull and bear markets were named after the way in which each animal engulfs its victims. It is a characteristic of a bull to drive its horns up into the air.  Conversely, a bear, like the market bearing its name, swipes its paws downward upon its prey.

Also, bears and bulls were literally once fierce opponents, when it was popular to put bulls and bears into the arena to fight. Matches using bulls and bears (whether together or against other animals) took place in the Elizabethan era in London and were also a popular spectator sport in ancient Rome.

Middlemen skins

Lastly, according to history, the middlemen involved in the bearskins sale would sell the skins that they hadn’t yet received.  These middlemen were the first short sellers.

After promising their customers to deliver the paid-for bearskins, these middlemen would hope that the near-future purchase price of the skins from the trappers would drop from the current market price.

If the price drops, the middlemen would make a personal profit from the spread between the prices for which they had sold the skins and the price at which they later bought the skins from the trappers. These middlemen became known as bears, short for “bearskin jobbers,” and the term stuck because it describes a person who expects or hopes for a decrease in the market.

Bull Market

Bull markets refer to the market going up aggressively over a period of time. As the market starts rising, there becomes more and more greed in the stock market.

A bull market basically refers to a market that is rising. It shows a constant increase in market share prices. At such times, investors always believe that the uptrend will continue over the long term. In this state, the country’s economy is typically strong and employment levels are high.

Bull markets show optimism, investor confidence and expectations that strong results should continue usually for months or years. It’s hard to predict consistently when the trends in the market might change. What’s more difficult is that psychological effects and speculation may play a big role in the markets.

Generally, a bull market happens when prices rise by 20 percent, usually before and after a 20 percent decline. Since they are hard to predict, bull markets can typically only be recognized once they’ve taken place.

Secular Bull Market & Market Bull

A secular bull market is a long-term, overarching trend that lasts 5 years to 25 years. A bull market can have a correction, drop 10 percent, and then continue its upward swing without entering a bear market. A secular bull market can have smaller bear markets within it and these are called primary market trends.

Meanwhile, a market bull is someone who thinks that prices are going up. That person is bullish. Clearly, a market bear is the opposite. He’s the one who thinks prices are going down and is bearish.

Bear Market

Bear markets is the opposing market of bull markets, wherein quarter after quarter the market is moving down about 20%.

A bear market is one that is in decline. Share prices are always dropping, causing a downward trend that investors believe will continue, which, in turn, extends the downward spiral. During the bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.

A bear market should not be mixed up with a correction, which is a short-term trend that has duration of fewer than two months.

While corrections offer a good time for investors to find an entry point into stock markets, bear markets rarely provide suitable points of entry. This is because it’s almost impossible to determine a bear market’s bottom. Trying to regain losses can be an uphill battle, unless investors are short sellers or use other investment strategies.

Bear Market Rally & Secular Bear Market

A bear market rally is when the stock market posts gains for days or even weeks. It can make many investors believe the stock market trend has reversed, and a new bull market has begun. But nothing in nature or the stock market moves in a straight line. Even with a normal bear market, there will be days or months when the trend is upward. Until it moves up 20 percent or more, it is still in a bear market.

Meanwhile, a secular bear market holds out anywhere between five and 25 years and the average length is 17 years. During that time, typical bull and bear markets cycles can occur but asset prices will return to the original level. There is often a lot of debate as to whether we are in a profane bull or bear market. For example, some investors believe we are currently in a bear market that began in 2000.

Characteristics of a Bull and Bear Market

Clearly, a bull or bear market condition is based on the direction of stock prices. Thus, there are some accompanying characteristics that investors should be aware of.

  • Supply and Demand for Securities

In a bull market, strong demand and weak supply of securities are very present. In other words, many investors are wishing to buy securities while few are willing to sell. Consequently, share prices will rise as investors compete to get available equity.

In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply and thus, share prices drop.

  • Investor Psychology

Because of how individuals’ perception of that behavior affects the market behavior, investor psychology and sentiment has an effect on market’s rise and fall. Stock market performance and investor psychology are mutually dependent.

In a bull market, investors willingly participate in the hope of gaining profit. During a bear market, market sentiment is negative as investors begin to move their money out of equities and into fixed-income securities.

Basically, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market that causes the decline in the stock market.

  • Change in Economic Activity

Because the businesses whose stocks are trading on the exchanges are participants in the greater economy, the stock market and the economy are strongly linked.

A bear market pertains to a weak economy as most businesses cannot record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market values stocks.

In a bull market, the reverse occurs. People have more money to spend and are willing to spend it that drives and strengthens the economy.

Bull and Bear are on a graphic with market prices.
Bull and Bear are on a graphic with market prices.

What to Do?

In a bull market, the ideal thing for an investor to do is to take advantage of rising prices by buying stocks early in the trend and then selling them when they’ve reached their peak. Any losses are minor and temporary during the bull market. Usually, an investor can actively and confidently invest in more equity with a higher probability of making a return.

On the other hand, the chance of losses is greater in the bear market because prices are continually losing value and the end is often not in sight. Even if you decide to invest with the hope of an upturn, you’re likely to take a loss before any turnaround occurs. Thus, most of the profitability will be found in short selling or safer investments such as fixed-income securities.

Conclusion

There is no way you can really predict market trends. Therefore, investors would be better off investing their money based on the quality of the investments. You should also have an understanding of long-term market trends from a historical perspective.

Both bull and bear markets will have a big influence on your investments. Therefore, it’s a good idea to take some time to determine the market trend when making an investment decision. Remember that over the long term, the stock market has displayed a positive return.

See Also: EMH: An Introduction to the Efficient Markets Hypothesis

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