Table of Contents
- 1 Bull and Bear, an Overview
- 2 What is a Bull Market?
- 3 What is a Bear Market?
- 4 From where the bull and bear markets got their names?
- 5 The bull market and bear market: what is the difference?
- 6 Characteristics of a bull and bear market
- 7 How to trade and invest in the bull and bear markets?
- 8 Computing changes in the market
Bull and Bear, an Overview
Bull and bear in the world of investments and trades are used to depict the market conditions. The terms bull and bear describe whether a particular market, at a particular time, is depreciating or appreciating. These movements in the market have a direct impact on the portfolio of investors and traders. Therefore, it is crucial to understand the bull and bear movements in the market.
What is a Bull Market?
A bull market is when everything in the economy is great, like when the Gross Domestic Product (GDP) is growing, and stock are rising. The bull is state or condition of the financial market of a group of securities is rising or is expected to increase. The term “Bull Market” is often used to refer to the stock market but can be applied to anything that is traded like bonds currencies and commodities.
As the bull market goes up, people start to put more money in the securities and market.
What causes a bull market?
There are two broad factors contributing to the formation of a bull market. First, a strong economy leads to a bull market. When the economy flourishes, people have more money and demand for products in general increases, the standard of living increases. People tend to invest more, and in turn, prices of securities rise and the market go up.
Second, when employment rises, people have more to spend and invest. This, in turn, increases prices of stocks and other securities in the market and gives rise to a bull market.
What is a Bear Market?
A bear market is that exact opposite of the bull market. A bear market implies a condition of a receding market, where the value of securities in the market keeps on decreasing quarter after quarter.
A bear market, therefore, becomes a danger spot for new investments as prices are on a downfall, and this leads to high volatility in the market.
What causes a bear market?
A slow-moving and inactive economy will lead up to a bear market. The causes of a sluggish economy? Low employment rates and infrastructural developments, less income to dispose of, drop in profits of big companies and businesses.
From where the bull and bear markets got their names?
Both the animals, bull and bear, are unimaginably powerful and full of strength. When such animals are used in the names to describe market conditions, it means that the impact created by bull and bear markets tend to be at extremes and can last for months, or even years.
The origins of the name bull and bear markets remain ambiguous and vague. But we would like to list down two possible explanations that can somewhat depict how the names must have emerged.
- The terms bear, and the bull has been said to come into existence in the world of investments in a way that these animals attack their enemies or opponents.
Bull, when attacking an enemy, shoves its horns up in the air. This relates to prices in the market rising. On the other hand, when a bear attacks its opponent, it will swipe down. This is illustrative of when the market is at a decline.
- If we go back, historically, the trade of bearskins was conducted through intermediaries. These middlemen would speculate on the prices of bearskins. They would sell the bearskins that they would receive in future. They would play on the future prices of bearskins, hoping and assuming the fall in prices. They would profit from the cost gaps in the selling and cost prices. These middlemen were eventually called "bears". And this term struck to depict the downfall in the investment markets.
The bull market and bear market: what is the difference?
- A bull market is a market where conditions of the economy are favourable and flourishing, and the market is on the rise. A bear market emerges in an economic recession and downfall, where the prices of securities are on a decline. Since markets are defined primarily by attitudes of investors, these terms are also used to define how the investors function. Some investors tend to be bearish; most of the investors, most of the time, are bullish.
- A bull market is defined with a substantial rise in prices over a period of time. In the case of stocks and equity markets, the bull market defines the rise in the price of companies' shares.
In such cases, the formed uptrend continues for many months and even years. In such a situation, the economy and infrastructure of the country flourishes and employment increases.
On the other hand, a bear market denotes downfall and decline. A market is typically not considered in bearish phase unless the market is in decline and has fallen 20 percent or more. Ina bear market, the prices of shares are frequently on a reduction. This leads to the emergence of a downtrend that continues for a period of time, creating a spiral of downfall. During a bear market condition, the economy is in unrest, sluggish and slowing down; unemployment rises, people have less money to spend.
- A bull market involves buying securities or stocks in large numbers. Since the value of stocks increase and the market is on the rise, everyone comes in to reap the benefits. Also, more people have more buying and investing power since the economy is on a pedestal.
On the other hand, in a bear market, all investors and traders want to sell their securities or stocks.
- A bull market is a signal of positivism and optimism when the Gross Domestic Product (GDP) of a country rises. On the opposite, the GDP of a country falls with the emergence of a bear market, marking pessimism.
- In a bull market, the demand for stocks is mostly greater or equal to the supply. The overall demand is buoyant. In a bear market, the demand slips to negative as most investors want to sell their securities or stocks.
- The Initial Public Offering (IPO) activity increases vastly in a bull market. In a bearish trend, the IPO activity takes a back stand.
Characteristics of a bull and bear market
- A bull market accounts for a robust demand and a fragile supply of the securities. Due to the increase in demand, the competition in the market increases, and this leads to a rise in the value of securities. A bear market is on the opposite end. More people want to sell and get rid of low-value securities and generate some money. Here the demand is substantially lower as compared to the extensive supply.
- The psychological aspect of an investor permits him or her to stay hopeful and optimistic in the market. The market sentiments in a bull market, therefore, are favourable. Investors willingly participate in the market with an expectation to reap profits. During a bear market condition, the whole sentiment turns negative. Investors want to move their money out if the market. The decline and downfall of the market shake the investor's optimism and confidence.
Taking advantage of a bull market
- Buy and hold
One of the most promising strategies in a bull market is to buy stocks or securities and hold onto them. This is done to sell the stocks in future at a more excellent price. This would require a lot of confidence in the investor's part. But the bull market brings a ray of hope and optimism that help most of the investors to be patient and keep on holding on.
- Buy and hold - increased.
This is an extension of the classic buy and holds strategy. It comes with additional risks. Here, the investor will continuously add to the shares he or she is holding onto as long as the prices are increasing.
Retracement refers to a period in which the trend or the movement of the market is reversed. Even during the bullish phase, it is unlikely that the market will always be on the rise. Sometimes, there would be dips in the market when the trend in general in upwards. It is good to buy securities at a lower price in such periods. Here the assumption that follows is that the bull market will continue and the prices will go up again.
- Full swing trade
This is one of the aggressive strategies employed by investors during a bullish market phase. Attempting full swing trade, the investors will try to pulp out the maximum profits from the market using different techniques.
Stages in a bear market
A bear market functions on the following four stages:
- The first stage is high prices and high optimism in the investors. At t6he end of this stage, the investors drop off the market, taking away all the profits they made at the hike of the market.
- During the second stage, the price began to fall sharply. At this stage, the price of securities start dripping, and the economic indicators tend to portray a gloomy picture. In such circumstances, the investors start losing confidence, and their optimism takes a backseat.
- In the third stage, the prices start to rise to some extent. Here, the speculators enter the market, pushing the price a little upwards.
- Now at the final stage, the stock and security piece are still on download, but the downfall is not as steep anymore. The prices decline at a slower pace. The low prices and better market conditions start attracting inventors back to the market. The conditions then transform the market to more of a bullish phase.
How to trade and invest in the bull and bear markets?
- In a bull market, it is best for investors to buy the securities at an early stage when the prices have not reached a high point. The losses will not be accumulated in a bull market, and the losses would not be permanent. This means that investors can invest in more securities and stocks without losing confidence, with the probability of reaping significant returns.
- In a bear market, the chances of losses are very high because prices are continuously declining and no one can foresee the end of it. Even then if you decide to invest in the hope that prices will reverse, you will still not be able to go through the tunnel of decline without assuming some loss. Therefore, it is advisable to invest money in fixed-income investments, mutual funds, or partake short selling.
- An investor can also decide to go with "defensive stocks". These are the stocks whose fate is not decided by the boom and fail of the market. Instead, defensive stocks remain mostly unimpacted or minimally impacted by the bullish and bearish trends in the market. These stocks tend to remain mostly stable in whatever market conditions. Such stocks are mostly owned by governmental entities.
- In a bearish market trend, an investor might decide to play short with the falling prices, and reaping some profits. There are various ways to implement such a scheme like buying put options, inverse ETFs, or short selling.
Playing on a short position in a bear market
- Short selling
Short selling is one way to make profits in a bear market. In this technique, the borrowed shares are sold and then bought back at lower costs. This involves numerous risks and can cause major losses if not implemented properly. The shares are to be brought from a broker before the position is placed. The profit or loss is accounted for in the cost gap between the selling price of shares and the price at which the investor or trader repurchases them.
- Put options
With a put option, the investor can sell a stock at a particular price before or on a specific date. This way, the investor can speculate on the falling prices in a bear market. With the put option, you have the freedom to sell the stocks, but you are not liable to. Buying put options is much safer than short selling technique.
- Inverse Exchange-Traded Funds
Inverse ETFs are also known as "bear ETFs" which help in scoring gains from falling prices. Inverse ETFs are similar to short selling the positions. With inverse ETFs, the bet is made on the decline of the market using futures contracts. If the market declines, the inverse ETF rises by mostly the same rate reducing the amount of commission and fee.
Computing changes in the market
The key to depict whether the market will be bear or bull is not to just analyse the market's reaction towards a particular situation or event, but also looking at a larger picture. One must also analyse market functioning over a longer run. Short term movements of the market cannot cause a long-lasting effect on the market. Whether the market will pan out as bull or bear, can be only predicted over a longer duration of time.
Also, not all movements and changes in the market are bullish or bearish in nature. Sometimes markets can go into a period of bland torpidity while trying to move towards a particular direction. In such a situation, the momentum of losses and gains will cancel out producing a flat trend in the market.
Both the bull and bear market can broadly impact your investments and have the ability to change the course of the entire trade. It is therefore recommended to take out some time to study the market thoroughly before investing any large sums in the market.
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Finally, understanding the bull and bear market takes patience and some through research. So do not back off from the hard work.