If you are new to investing and are confused by other investors’ use of bull and bear markets, then you’ve come to the right place. This article is written to guide you through these terms and tell you their difference.
Moreover, this article will cover the basics of this topic, and if you are interested to learn more, you can check out the author Percival Knight, who is an experienced trader. Bull and bear markets are the two phases of the market based on the increase and decrease of the board index over two months. Let’s go over them one by one.
Favorable economic conditions give birth to bull markets. It is a 20% increase in the board market index over at least two months. A rise in the cost of a company’s shares is also one of the indications of a bull market. As the investors believe the uptrend will continue for a long time, they are comfortable with their money remaining in the bull market.
Moreover, since this tendency can help them earn a profit because the stock prices are rising, the investors keep the money and invest more to gain as much as possible from this situation.
Most investors are “bullish”, meaning they invest during this phase. A bull market lasts longer than a bear market. But the average amount of years it can last is 6.6 years. During this period, the average profit can reach 339%.
According to the SEC, a 20% decline in stock prices over a duration of two months at least indicates a bear market. The market sentiment during this period is not very hopeful.
Economic downfall or uncertainty caused by geopolitical dangers or bursting market bubbles gives birth to this phase. Selling investments to ensure that a significant loss is not suffered during a bear market is the typical behavior of investors. This selling of investment causes the already falling prices to fall more because they sell their stocks believing that the downward trend will continue. The average duration of this trend is 1.3 years, and the average amount of losses within that duration is 38%.
Origin of the Names
People point to different stories when asked about the origin of these names. However, the most common of them all is due to the way these animals ferociously attack their prey. In the case of a bull, it would thrust its horns up in the air and charge ahead. Whereas, in the case of a bear, it will grab its victim by its claws and then drag it down.
Differences Between a Bull and a Bear Market
Both these markets can affect the various economic indicators significantly but in different ways. The main indicators are employment rates, supply, demand, and interest rates. To ensure you are investing your money correctly, you should know the differences between these two phases.
Supply and Demand
In the bull phase of the market, the stock prices increase. A great demand for the shares follows an increase in stock prices. However, unfortunately, this demand is not met because few people are willing to sell their stocks. It is because fewer people want to sell the securities, but many people want to buy them.
Whereas in a bear market, due to the decreasing stock, people want to sell their shares, but the demand is deficient. Because of this, the share prices plummet.
The people’s reaction to the market conditions is termed investor sentiment. It is crucial to the market because it acts as a determining factor for its rise or fall. That is why the two variables, i.e., the stock market performance and investor sentiment, are co-dependent. For example, when there is a bear phase of the market, the market is already going in a downward trend, and the investors then sell their stock, increasing the downward trend.
Gross Domestic Product (GDP)
The gross domestic product also depends on the market’s phase. In the bear phase, the market is already in a recession. Therefore, people do not buy much, which causes the GDP to decrease.
In the bull phase, on the contrary, the investors are putting in more money in the market, which causes the companies’ revenues to increase. With the increase in revenue, the employees’ salaries are guaranteed to rise, which leads to people spending more money on buying stuff. Hence, the GDP increases.
The unemployment rate is also one of the differences between the bull market and the bear market. It is because it depends on these phases. If the unemployment rate is high, the bear phase is going on – the companies have little revenue to pay the workers’ salaries; hence they either do not hire workers or have to fire some.
Whereas during the bull phase, the investors invest more money in the market, the companies’ revenue increases, and so do employment opportunities. Hence, the unemployment rate goes down during the bull phase.
Inflation normally occurs within the bull phase. However, a bear phase may result in high inflation under some circumstances. The cause of inflation in the bull market is increased demand for products and services. In contrast, the decrease in order in the bear phase becomes the cause of deflation.
There is also a difference in interest rates in both bear and bull markets. In bull markets, there is a low interest rate. A high interest rate can be seen in the bear market. In bull phases, because of the low interest rates, the companies tend to expand by borrowing money. On the other hand, high interest rates prove to hinder the company’s growth.
You should not try to time the market. It is because you could lose a lot of profit by selling too quickly or hoarding an investment. It is in your best interest to plan according to the conditions of the market at the present moment. Your primary focus should not be on whether to invest but on how you will invest.
Lastly, instead of selling your assets, you should try to hold a diversified mix of assets when the market puts you in an uncomfortable position. It’s always better to have a combination of stocks, commodities, and pairs, instead of hoarding up just one type of investment. This will ensure that when the market fluctuates for one kind of asset, you will still have backup assets to fall onto as you let go of one type of asset.