Difference Between Bull and Bear Market

The stock market of any country in the world is like a heartbeat, which is volatile throughout, depending on various circumstances. The market will thus go either up or down, which in financial terms is referred to as a ‘Bull Market’ when the general market scenario is upbeat, and the stock market is rising. On the other hand, if the market moves downwards, it is referred to as a ‘Bear Market.’ The terminologies apply to how each of these animals attacks their opponents. The bull will thrust its horns in the air in respective scenarios, whereas a bear will stamp its paws down on its prey.

A bull market is when the economy is very smooth, the economy’s GDP is rising, and job creation is also on the rise. The selection of stocks is more comfortable in such a scenario as the overall health is stable. If an investor is optimistic, they are said to have a ‘bullish outlook.’

A bear market is the opposite, the economy is under a recessionary phase over a long period, and stock prices are plummeting rapidly. As a result, stock selection becomes very difficult, and investors focus on making money by selling stocks (short selling)(short Selling)Short Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen.read more. Though one with a pessimistic opinion is called someone with a ‘bearish outlook,’ many anticipate such a situation as temporary and indications of the revival stage being around the corner.

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What is a Bull Market?

This situation is defined as a marketplace whereby the prices of listed securitiesListed SecuritiesListed security refers to a financial instrument such as stocks, bonds, derivatives, etc., registered with and readily tradable on the stock exchanges like NASDAQ and NYSE.read more continuously rise due to favorable macroeconomic scenarios or improved internal circumstances of the firm or sector. In general, the terminology applies to stocks, but it also gets referenced to other asset classAsset ClassAssets are classified into various classes based on their type, purpose, or the basis of return or markets. Fixed assets, equity (equity investments, equity-linked savings schemes), real estate, commodities (gold, silver, bronze), cash and cash equivalents, derivatives (equity, bonds, debt), and alternative investments such as hedge funds and bitcoins are examples.read more such as Bonds, FOREX, and Commodities, etc. Since the laws of demand and supply influence the market, prices in financial marketsFinancial MarketsThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more will increase when the supply of stock falls and vice-versa. Specific essential facts are:

  • Bull markets are preceded by Investor confidence, positive expectations, and general optimism in the market.In the initial stages, most market changes are psychological and may not necessarily be accompanied by robust economic information or Corporate earnings.There will be a massive demand for Call options in the derivatives market since the overall sentiment is upbeat.

It is to be noted that “Bull Markets” typically have four phases indicating its life-cycle:

  • In the first stage, one is reviving from the pessimistic approach left behind due to the bearishBearishBearish market refers to an opinion where the stock market is likely to go down or correct shortly. It is predicted in consideration of events that are happening or are bound to happen which would drag down the prices of the stocks in the market.read more market scenario. The prices are low, and investor sentiment is quite weak.The second phase ignites a revival of stock prices, earnings by corporates, and trading activity picking up with the economic indicatorsEconomic IndicatorsSome economic indicators are GDP, Exchange Rate Stability, Risk Premiums, Crude Oil Prices etc. read more performing at above-average levels.In the third phase, market indexesMarket IndexesA market index tracks the performance of a diverse selection of securities that make up a significant part of the financial market. It serves as an indicator of the overall financial market condition by listing the historical and real-time trends in different market segments.
  • read more and securities touch new trading peaks. Security trading continues to rise, and dividend yieldsDividend YieldsDividend yield ratio is the ratio of a company’s current dividend to its current share price.  It represents the potential return on investment for a given stock.read more fall low, indicating sufficient liquidity in the market.In the final phase, IPO activities are high, along with Trading and Speculation. Stock P/E ratiosStock P/E RatiosThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more are at an all-time high.

Though bull markets offer plenty of opportunities to make money and multiple existing investments, such situations do not last forever. The precise timing of its entry and exit cannot be predicted. Investors must know when to buy and sell to maximize their gains and attempt to time the market.

One of the popular instances of a Bull market is ‘The Long Bull Market of 1920’s’, which was fuelled by the economic boom and prosperity brought to Consumerism in the USA, easy availability of credit facilitiesCredit FacilitiesCredit Facility is a pre-approved bank loan facility to businesses allowing them to borrow the capital amount as & when needed for their long-term/short-term requirements without having to re-apply for a loan each time. read more, and increased opportunities for leverage. The situation was so optimistic that stocks were purchased on Margins, i.e., on loaned money.

What is Bear Market?

Such a situation depicts a downward trend in the market over some time. The markets have a pessimistic approach, and the prices of assets are either in decline or expected to fall in the immediate future. It will cost investors a lot of money as security prices fall across the board, and investor confidence is also expected to hit.

The characteristics and causes of a bear market will vary as per circumstances. Still, the economic cycles and investor sentiment play a pivotal role in the anticipated direction and how long it is expected to last. Some of the indicators of a weakening economy are:

  • Low employment opportunitiesLess Disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more in the hands of the general publicDeclining business profitsExistence of several new trading lows and troughsShort selling or increasing use of Put optionsUse Of Put OptionsPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated.read moreUnprecedented changes in the Government rates or various tax rates

Bear markets typically have 4 phases of their occurrence:

  • In the first phase, Investor sentiment and prices of securities are very high, but the investors are extracting maximum profits and exiting the market.In the second phase, prices of stock fall rapidly, trading activity and earning of corporates fall, and the positive economicPositive EconomicPositive Economics is a branch of modern economics that describes, explains, & clarifies several current economic facts with an objective approach. It prohibits value judgement & only revolves around the “what is” scenario. read more indicators are not performing as expected. Investors’ confidence heads towards pessimism and can create a situation of panic. Market indices and many securities reach new trading lows, and dividend yields also become very high. It indicates more money is required to be pumped into the system.The third phase highlights the entry of speculatorsSpeculatorsA speculator is an individual or financial institution that places short-term bets on securities based on speculations. For example, rather than focusing on the long-term growth prospects of a particular company, they would take calculated risks on a stock with the potential of yielding a higher return.read more in the market with prices and trading volumes continuing to rise.The last phase indicates the further downfall of stock prices but at a slower pace. It is considered a point of the lowest ebb. Investors start believing the worst may be over, and positive reaction starts flowing in with bear markets, eventually allowing the bullish outlook to re-enter.

A prominent example of a Bear Market is the recession, followed by the Wall Street stock market crash of 1929. The investors were struggling to exit the market with sustainable losses getting incurred. To prevent excessive losses, investors continued selling their stocks, causing a further decline. The market collapsed on October 29, 1929, followed by a sustained depression in the economy called the ‘Great Depression.’ The Dow Jones Industrial Average declined by almost 90% through 1932.

Bull Market vs. Bear Market Infographics

Let’s see the top 7 differences between the bull market vs. bear market.

Key Differences

Despite the terminologies being used in tandem while explaining the concepts, the differences in both these scenarios are stated below:

  • The market is mentioned as bulls when the overall market scenario is positive and the market performance is on the rise. A bearish market is when the performance of the market is on the decline.In a bullish market, the investor’s outlook is very optimistic, and this is visible from the fact that investors will be taking a long positionLong PositionLong position denotes buying of a stock, currency or commodity in the hope that the future price will get higher from the present price. The security can be bought in the cash market or in the derivative market. The course of action suggests that the investor or the trader is expecting an upward movement of the stock from is prevailing levels.read more in the market. This way, the anticipation is that security prices will rise further, and investors have an opportunity to maximize profit opportunities. Conversely, in a bearish market, the market sentiment is quite pessimistic and reflected by investors taking a short positionShort PositionA short position is a practice where the investors sell stocks that they don’t own at the time of selling; the investors do so by borrowing the shares from some other investors to promise that the former will return the stocks to the latter on a later date.read more,  i.e., selling a security or undertaking a put position with increased anticipation of a falling market. Hence, if the price falls below the contracted price, the option holder will accordingly book a profit.The economy grows sustainably in a bullish market. In contrast, in a bearish market, the economy will either fall or not grow at a faster pace, as in the bullish outlook scenario. In both these situations, an indicator like the GDP (Gross Domestic Product) plays a vital role in giving a bird’s eye view of how the economy performs based on the existing factors.In a bullish market, the market indicatorsMarket IndicatorsMarket indicators serve as quantitative measures to the traders for predicting the stock market trends and fluctuations with the help of financial ratios and other relevant data so acquired.read more are robust. These indicators are used in technical analysisTechnical AnalysisTechnical analysis is the process of predicting the price movement of tradable instruments using historical trading charts and market data.read more to forecast market trends and various ratios and formulas that explain current gains and losses in stocks and indexes and their expected movement in the future. E.g. The market breadth index is an indicator measuring the increasing number of stocks versus those falling. An index of greater than 1.0 indicates a future rise in market indices and vice-versa if it is below 1.0. In a bearish market, the market indicators are not strong. In either of the scenarios, the causes are interdependent, and the cascading effect for the same is observed.The job market in a bullish situation is very bright, and there are more disposable incomes in the hands of the public in general. However, in a bearish market, the job market is stiff, and efforts are being made to control expenses rapidly if the situation is not improving.In a bullish market, the liquidity flowing in the market is vast, and investors continue to pump more funds with increased trading activity and invest in stocks, gold, real estate, etc. Still, the liquidity dries up in the system in a bearish market, and investors are reluctant before making any commitments. The investments made during a bullish scenario are either sold, preventing further downsides, or holding back to them for future usage. It may give rise to hoarding and black marketing situations.IPO activities are encouraged in a bullish market since the market sentiments are positive, and investors are willing to invest more money. However, in a bearish market, IPOs are avoided since investments would not be encouraged, and people will prefer to hold on to the existing positions and liquidity.International investmentsInternational InvestmentsInternational investments are made outside of domestic markets and offer portfolio diversification as well as risk management opportunities. As a result, an investor can diversify his portfolio and extend his return horizon by making international investments.read more will automatically get encouraged in a bullish market to expand the existing portfolio. For instance, if India is going through a bullish phase and South Korea decides to make generous investments in India, such a move will encourage a smooth phase for India, enhance the investment made by South Korea, and in turn, boost the economy for South Korea thereby spreading the effects of a bullish market across borders. However, in a bearish market, international investments may not be a favorable option for other countries, and such a move could be postponed to a futuristic date.A bullish market will encourage the banking sector to reduce the interest rates on loans encouraging business activities to grow, prompting expansionary policiesExpansionary PoliciesExpansionary policy is an economic policy in which the government increases the money supply in the economy using budgetary tools. It is done by increasing the government spending, cutting the tax rate to increase disposable income etc.read more by the Central Bank and the Government. Conversely, in a bearish market, the banking sector will curb the usage of money for emergency situations prompting contractionary policies by the highest authorities. The interest loans would either be held stable or increased.In a bullish market, the yields on securities and dividends will be low, highlighting the financial strength of the investor and the security others can receive on the investment made, whereas, in a bearish market, these yields shall be very high, indicating the requirement of funds and attempting to lure investors by offering higher yields on securities at a later date.

Bull Market vs. Bear Market Comparative Table

Conclusion

Whether the market is going through a Bullish or a Bearish market scenario is not in the hands of an individual or a single factor but large scale factors and other macroeconomic situations. Every investor has to go through such phases since these situations are inseparable. In statistical terms, the market is bullish when a rise of 20% in the stock market’s performance is observed. On the contrary, if a downfall of the stock market of 20% or more is noticed, then a bearish market situation is highlighted.

Investors will direct their investments based on various factors that define the outlook through which the market is going through. The entry and exit of the investor gets impacted, and investor sentiment plays a vital role in defining how long a bullish or bearish outlook exists. One cannot escape the withering of the scenarios, and thus a judgmental call has to be taken before investing, and patients should also be held to go through choppy market conditions.

Bull Market vs. Bear Market Video

This article is a guide to Bull Market vs. Bear Market. Here we discuss the top differences between them along with infographics. You may also have a look at the following articles –

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