Stock markets are known to rise and fall in recurring cycles. It is difficult to accurately predict stock market movements, but they can still be explained and understood. A continued rise in stock prices is called a bull run, whereas a consistent fall is known as a bear market. These phases are different from short-term corrections in stock prices. Typically, a bull or a bear run results in at least a 20% shift in the index value.
Let’s learn about bull and bear markets in detail.
Why are bull and bear markets called so?
The terms ‘bull’ and ‘bear’ are commonly used in stock market parlance. These terms come from the way in which these animals tend to attack their opponents.
A bull barges its horns up in the air, whereas a bear pushes its paws downward while attacking an opponent. These actions are used as metaphors for stock market movements. Thus, if a stock market trend is seen to be going upwards, it is called a bull market and if stock market trends are going downwards; it signifies a bear market.
What is bull market?
In financial parlance, the term bull market is used to describe an economic situation of a country that is on a growth trajectory and has an optimistic outlook.
From a financial markets perspective, a bull market sees stock prices consistently rising or expected to rise and is phased across several months or even years. The term bull market refers to a stock market scenario and is applicable to traded securities, such as stocks, bonds, real estate, currencies, commodities, etc.
For example, a bull market was seen during the period between December 2011 and March 2015 in Indian stock markets as Sensex went up by nearly 98%.
While there is no specific way to identify a bull market situation, it is assumed to exist when all financial instruments rise in value for an extended period of time. This is one of the reasons why investors who are confident about the stock market performance are known as being bullish.
What are the indications of a bull market?
Here are the key indications of a bull market that investors must look out for:
1. Overall rise in stock prices
If the prices of most stocks rise for a continued period, more investors gain confidence about the market performance and is an indication of a bull market. This also results in most major indices rising for a prolonged period.
2. Rise in Gross Domestic Product (GDP)
If a country’s GDP rises, it means consumer spending has risen and is an indicator of a well-performing economy and may see a bull market situation.
3. Rise in employment rate
As an economy grows, it also means growth of businesses and thereby growth in the employment rate. A bull market often sees more people being employed.
How does a bull market benefit investors?
A bull market comes with various profit-making opportunities for investors since stock prices continue to rise. However, it may not last forever and investors may also not have an advance notice of its arrival. Therefore, it is important that investors know when to buy and sell stocks as per individual investment objectives.
What is a bear market?
A bear market is the opposite of a bull market, during which stock prices tend to consistently decline or are expected to decline for a prolonged period. As an example, the Indian stock markets saw the Sensex drop by more than 23% during March 2015 and February 2016.
A bear market situation describes an economic trend of stagnation or a downward outlook on an economy. In this situation, people’s confidence is usually low and more people begin selling stocks due to fear of further slowdown of the economy. A bear market is often used as an indicator of a recession, i.e. a long-term period of negative growth.
What are the indications of a bear market?
A bear market is just one of the economic cycles that every investor has to go through and survive. Here are some of the indications of an upcoming or ongoing bear market:
1. High unemployment rate
High unemployment rates are seen as a sign of an upcoming or ongoing bear market. As the economy slows down, companies start to lose business and this causes layoffs, which further impact the stock markets.
2. Falling stock prices
As stock prices start to fall, fewer people are keen on buying stocks. Thus, stock prices start to plummet and the market begins to fall, resulting in a bearish situation.
While a bear market may seem bad for investors, it may not always last long. Economic problems can come up and even go away depending on the stock market resilience and how investors react to it.
In a bear market, investors can benefit by adjusting their investment portfolio to focus more on safer investment avenues, such as fixed-income investments. Since no one can tell when a bear market situation will end, such instruments can benefit the investor by allowing stable returns from investment.
How can an investor predict a bull or bear market?
Predicting a bull or a bear market may be difficult, but not impossible. As the sayings go ‘History repeats itself’ and ‘what goes up must come down’, if the current market sees share prices rising, an investor must know that these might fall in the future, resulting in a correction or a future bear market. If stock prices are falling in the current market, an investor can be confident that these will rise again and a bull market will arise.
While an investor cannot exactly predict when a bull or a bear market will arise, certain factors can affect current market situations and drive changes.
- An unexpected international crisis tends to create a bearish market since the economies are negatively affected, an apt example for this being the onset of the pandemic.
- If there is negative news about a company’s market capitalization, it affects the market and results in a bearish market.
- Positive news about a large-scale company can create a bullish market.
- A bull market is also seen when a country wages war, since it may produce additional jobs and the investors begin to feel confident about its win.
A bullish market is when the overall demand for stocks is higher than their supply, resulting in higher share prices. A bearish market arises when the supply is higher than the demand and results in a significant drop in share prices.
Investors must preferably buy more shares in a bearish market, since the shares are usually available for lower prices. They can then sell their shares during a bullish market since more people will be willing to buy during this time and can therefore book profits by getting higher prices.
Although bear markets tend to be scary for investors, stock market performances have proven that they will bounce back, eventually. If an investor focuses on potential gains rather than potential losses, there is a good scope for making money by picking stocks at lower prices during bear markets.
Yes, you can make money in a bear market too, as it provides a different set of opportunities. Short positions, put positions, and short ETFs are some of the commonly used strategies by experienced traders during bear market conditions.
2021 is considered being a bull market, especially in the Indian context and with multiple IPOs and rising stock prices.
Yes, you can use the ‘buy today sell tomorrow’ option if available with your broker to buy stocks today and selling tomorrow despite the T+2 settlement cycle.
Equities or stocks are ideal for long-term investments. Therefore, depending on personal investment strategy, one should hold a stock for at least 2-3 years before selling. Many investors do day trading and may prefer to sell the shares within a few days, too.