You might think of the wild animals when you hear the word bull and bear. However, in the field of investing these words have deeper meanings.
If you still can recall, we mentioned bull market and bear market when we discussed Oscillators: Relative Strength Index (RSI).
Today we will discuss Bull Market and Bear Market. We’ll also talk about where these terms came from.
The Background of Bull and Bear Markets
In the world of investing, you will hear the words “bull” and “bear” to describe the conditions of the market.
But what is still unclear to everyone is where the terms “bull” and “bear” came from. However, today we will give you the most common explanations of these two terms.
The terms bull and bear are named after the way in which each animal attacks its preys. It is the characteristic of a bull to drive its horns up into the air. Meanwhile, a bear will swipe its paws down upon its victim.
Bears and bulls were once fierce opponents, when it was still popular to put bull against bears in arena to fight. Did you know that the matches between bulls and bears took place in the Elizabethan era in London? Well, believe us when we say it is. In addition, it is also a popular spectator sport in ancient Rome.
You now have enough knowledge about where the terms bull and bear came from. Now, let’s discuss the difference between the bull market and the bear market.
A bull market is a financial market of a group of securities in which the prices are increasing or expected to go up.
To simplify it, bullish market is referring to a market that is on the rise.
Take note that bull markets are characterized by the confidence of the investor, optimism, and expectations that strong results should be continuous.
However, it is hard to tell consistently when the trends in the market might change. As part of the difficulty, the psychological effects and speculation may sometimes play a big role in the markets.
As an investor, the ideal thing to do in a bull market is to take advantage of the rising prices. You can do this by buying stocks early in the trend and then you sell them when they reach their peak.
In addition, with the bullish market, any losses must be minor and momentary. As an investor, you can actively and confidently invest in more equity with a higher probability of making a return.
A bear market is a condition in which the prices of securities fall and widespread pessimism can cause the stock market’s downward spiral to be self-sustaining.
Investors anticipate losses as pessimism and selling go up. However, figures differ. A downturn of 20 percent or more from a peak in several broad market indexes, just like the Dow Jones Industrial Average or Standard & Poor’s 500 Index, over a two-month period is considered an entry into a bear market.
Bear market implies a decline in the market.
You should not confuse bear market with correction, which is a short-term trend that has duration of less than two months.
Corrections offer a good time for value investors to find an empty point into the stock markets. Meanwhile, bear market provides suitable points of entry.
Take note that trying to recoup losses can be a hard battle, unless if investors are short sellers or use other strategies to make gains in falling markets.
Yes, you heard it right; investors can make gains in a bear market by short selling. This kind of technique involves selling borrowed shares and buying them back at lower prices.
The chance of losses in a bearish market is greater since prices are losing value continuously and the end is often not in sight. Even if you decide to invest with the hope of an upturn, you will most likely lose before any turnaround happens.
Characteristics of Bull and Bear Markets
We know that the condition of both bull market and bear market is marked by the direction of stock prices. But there are some accompanying characteristics that investors would like you to be aware of.
Supply and Demand for Securities
- In bull market, we can see a strong demand and a weak supply for securities. In other words, most of the investors are wishing to buy securities while others are not willing to sell. As an outcome, the prices of share will increase as investors compete to attain available equity.
- In bear market, it is the opposite of bull market as most investors are looking to sell securities than to buy them. The demand in bear market is significantly lower than supply. This means that the share prices will decrease.
Change in Economic Activity
- A bear market is associated with a weak economy as most of the businesses are unable to record huge profits. This is because of consumers who are not spending nearly enough. As a result, the profits will decline and directly affect the stock market values.
- With the bull market, on the other hand, people have more money to spend and willing to spend it. This results to driving and strengthening the economy.
- In a bull market, investors are willing to participate in the hope of gaining a profit.
- Meanwhile, during a bear market, the market sentiment is negative as investors are starting to move their money out of equities and into fixed-income securities. Then they will wait for a positive move in the stock market. As a result, the drop in the stock market prices shakes the confidence of an investor. This causes the investors to keep their money out of the market, which can result into declining in stock market.
As an investor, you should know the terms that are being used in the field of investing, especially if you are just starting.
Bull Market and Bear Market will have a big influence on your investments. It is a great idea to take some time to determine what is happening in the market before making an investment decision.
To become successful in the field of investing, know the things that can help you and harm you along the way.
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