The terms bull and bear market are quintessential in investment circles. Even though these terms are relatively simple and easy to understand, their causes are sophisticated and complex that depict market conditions.
Since the direction of the market plays a significant impact on the portfolio of every investor, it is crucial to understand the meanings of ‘bull’ and ‘bear’ in the larger context. That is knowing its meaning and implications can determine how the bull market and the bear market can affect you.
Understanding bull and bear markets
In the stock market, bull and bear are terminologies that are used to convey the progress of the market and its direction. Typically, a bear market is indicative of falling prices in the stock market, while on the other hand a bull market is a sign that the market is appreciating in value.
The bull and bear market meaning have a tremendous impact on investors. These terms also reveal how the market is shaped by investors' attitudes, ensuing trends and overall market sentiments.
A bull market means the stock market is on the rise. A sustained increase in market share prices is typically seen in a bull market. Under such a scenario, investors are upbeat and optimistic that the rising trend will continue over a long period. A sustained bull market scenario also shows the strength of a country's economy and high employment levels.
On the other hand, a bear market refers to a declining market. In this scenario, company share prices continue to dip, leading to a downward trend. In such a bear market environment, investors believe that the downward trend will perpetuate into a downward spiral. Typically, a prolonged bear market situation also points to a slowdown in the economy and rising unemployment as companies begin to lay off their workforce. It is important to note here that a bear market can be dangerous to invest in, as securities continue to lose their sheen and value.
Bull and bear market characteristics
It is crucial to be aware of the ensuing attributes of a bull and bear market. Here is a list of factors of the various bull and bear market conditions.
Supply and demand
Generally, there is a robust demand and weak supply for securities in a bull market. In such a scenario, most investors look to buy securities, but very few are willing to sell it in an uptrend. Hence, share prices continue to grow, while investors are competing to buy equities that are available in the market. On the other hand, an increasing number of people are looking to sell their equities and securities rather than make purchases. There is a significant low demand for fixed-income securities, while prices of equities rise.
Investor psychology and sentiment majorly impacts the market price in any scenario. This is because the behaviour of the market is affected and determined by investor behaviour and psychology. In the stock market, performance of share prices and investor psychology are mutually dependent. In a bull market, investors are continually hoping to reap profits; whereas in a bear market there is immense investor negativity and this sentiment shows as money moves out of equities and into fixed-income securities. Investors are cautious in a bear market and look for positive movements, while at the same time refraining from investing in equities. In short, the stock market decline negatively impacts the confidence of investors preventing them from investing in companies, thus causing an overall price decline as the outflow grows.
Correlation between the economy and the stock market
Since companies whose stocks are trading in the stock market are significant players in the country's economy, their performance can influence the economy. Typically, it is seen that a weak economy is associated with a bear market. This is because most companies are unable to show profitability as consumers are spending less. In turn, a downturn in company profitability directly affects stocks and their market values. In a bull market, the opposite takes place, as consumers have adequate money to spend and their expenditure propel and strengthens the country's economy.
Observing market changes
The principal causal factor of whether the market is bullish or bearish is not seen in the short term, but rather its performance in the long run. This means that a bull or bear market is not determined by the stock market’s spontaneous reaction to any specific event. Tiny movements could represent a short-term trend or correction in the market. It is in the extended time frame that determines whether the stock market will turn bull or bear. Sometimes, the stock market may experience an inactive period as it is looking for a direction. Here, a chain of downward and upward movements could, in reality, wipe out gains and losses leading to a flat-market trend.
What you can do in any market
The ideal thing to do in a bull run is to exploit rising prices and purchase stocks early on in the trend if you can. You can then look at selling them when these stocks reach their peak. Any losses that you experience in the bull market would be minor and temporary. You could briskly and comfortably invest in more equities with a higher likelihood of making a profit.
In a bear market, the chance of assuming losses are higher as share prices are continually losing value without an end in sight. Hence, if you are looking to invest in a bear market with the hope that the upturn will be around the corner, you may have to be prepared to take on losses before the positive turnaround takes place. Hence, if you are well-versed in the stock market, you could try short selling, or if you are trying your hand in the stock market for the first time, you may want to stick to safe investments such as fixed-income securities.
Some investors opt for defensive stocks, whose achievements are not affected by the trends in the market. Such stocks can be looked at as stable investments at a time when the economy is in a slump; these stocks are even beneficial in a bull market. Examples of these defensive stocks include utilities that are often government-owned and essentials that consumers buy irrespective of how the country's economy is functioning.
Bull and bear markets play a prominent role on investors’ emotions and investments. Hence, it can be an excellent idea to devote some time in determining how the market is performing before deciding on an investment decision. It is important to note that despite current market sentiments and trends, over the long term, the stock market has always been beneficial for its investors.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.