WHAT IS A BULL AND BEAR MARKET?

stocks

When you start investing in the stock market, you will often hear the terms “Bull” and “Bear”. As an investor, it is very important that you know the ABCs of the Stock Market. There are a lot of terms used in the stock market and you should be well versed with them so that you are involved in the game of investing. So let’s take a look at what bull markets and bear markets mean.

Bull Market

A bear market means a market that is on a rise. Rising market is named as a “Bull Market” because the bull always charges and attacks with its horns in the upward direction.

In a bull market, you will know that everyone is optimistic around you. The share prices of almost all the stock rise more day by day and make new highs and everyone buys more and more stocks. 

You will observe the experts in the news saying that the market will go on increasing and keep on making new highs. 

Bull markets happen when the economy is in great shape or is on a good path to recovery after a crash. 

Unemployment falls as companies want to increase their workforce as they want to be the best among its competitors.

Bear Market

A bear market means a market that is on a fall. Falling market is named as a “Bear Market” because the bear always attacks with its claws in the downward direction.

Generally, a true bear market means when the market as a whole falls more than 20% from the recent highs. In bear markets, you will see pessimism all around you. 

The share prices of almost all the stock fall more day by day and everyone sells their stocks. Experts in the news will say that the worst is yet to come. Bear markets happen when the economy is crashing like the time of covid-19, etc.

Unemployment rises as companies start to lay off their employees as they don’t have enough money with themselves.

Now that you have a basic idea of what bear and bull markets mean, let’s look at various characteristics that are observed in these types of markets:

1) Demand and Supply

Bull Market: In a bull market, you will observe a great demand and a weak supply as many new investors as well as established investors rush to buy stocks and no one is willing to sell them and thus the stock prices keep soaring.

Bear Market: In a bear market, you will observe a weak demand and a strong supply as the investors start to sell their stocks and thus the stock prices keep on falling.

2) Economic Situation

Bull Market: In a bull market, the economy is on a rise, and many new businesses are started and the existing companies’ revenues and profits increase as the customers have money to spend.

Bear Market: In a bear market, you will see that the economic condition is very bad and many of the businesses have to shut down because customers have no money to spend which leads to a decrease in the revenue of the company which in turn leads to a rise in unemployment.

3) Investor Mindset

Bull Market: In a bull market, the investors are very optimistic about the stock market and put all their money in the stock market as they think that market will keep on going up forever (which is not at all true). 

Investors have a Fear Of Missing Out (FOMO) and think that they will miss out on this opportunity to profit from this bull market. You will see a lot of new investors rushing into the stock market.

Bear Market: In a bear market, investors have a highly pessimistic mindset and they start to sell their stocks and think that the worst is yet to come and the prices will keep on falling. Investors think that it’s better to minimize the losses rather than staying and buying stocks at a low price.

4) Trend

Bull Market: During a bull market, the trend of the market is known as Bullish. You will hear statements from financial experts like “We are bullish on the stock market” or “We are bullish on this particular stock”.

Bear Market: The trend of the stock market is known as Bearish. You will hear statements from financial experts like “We are bearish on the stock market” or “We are bearish on this particular stock” or “The economy is in danger”.

What to do in a Bull and a Bear Market?

You have now understood when a market is called bearish and bullish and you know how the landscape is during each of these markets. Now the main question is that what should an investor do in a bull market and a bear market.

Bull Market:

In a bull market, you will find that the prices keep on increasing day by day and you get tempted to get into the stock market. You might hear your friend or colleague say that put your money in the stock market, it’s a great time and you will profit heavily. Listening to all this will give you FOMO and you will rush to buy stocks.

An intelligent investor just waits and watches in a bull market and waits for the optimism to settle. He/she knows that most of the stocks in a bull market are overpriced and your chance to profit is in fact reduced. In a bull market, more than 90% of the stocks will definitely be overvalued. 

Just wait for the prices to settle, look for strong companies, and buy when the prices become reasonable enough. 

You will regret the decision of buying heavily in a bull market. Let the profits of your existing stocks keep running. 

Avoid buying as much as you can and if your stocks are in profits then consider booking partial profits.

Bear Market:

In a bear market, the natural tendency of all the investors is to keep selling and covering the losses. People don’t think from the other perspective that due to a bear market, you are getting the stocks of great companies at a greater discount than before. Instead of thinking that the prices will keep on going down, think of the bear market as SALE.

An intelligent investor will buy as much as she can at a very low price. The only thing to consider is that not all stocks that you get at a lower price are destined to succeed. Never avoid doing some homework and buy only quality stocks.

A bear market is the best time for new investors to get started in the stock market. Keep learning, do some research on how to pick great stocks and you will definitely profit as the market won’t keep going down forever. 

Keep buying partially on every dip and grow your portfolio. 

Existing investors can average out the stocks that are in a loss instead of selling them at a loss. Remember that it is in a bear market that you can find real gems of stock at dirt cheap price and you have a great chance to create long-term wealth.

CONCLUSION

As an investor, you should make sure that you know the vocabulary used in the stock market so you can speak the language of the stock market. People don’t get in stock markets only because they find these terms very difficult and find it better to avoid stocks altogether. 

It’s only when you open yourself to learning, you find out that these terms are very basic and very simple to understand. 

Learning should be a lifelong process because the stock market is very vast. You will keep gaining experience over the years. 

Bear and Bull markets are very easy to understand, the main thing to understand is how a common investor reacts in each type of market. Be a spectator in the bull markets and be an active buyer in the bear markets as the stocks are on sale.

Don’t go with the crowd as the crowd reacts emotionally. 

Think to link an intelligent investor and invest with logic and avoid emotions as much as possible!

Related Blogs

Quick Inquire

Pulse Project