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Differences Between Bull Market 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 as a ‘Bull Market’ when the general market scenario is upbeat and the stock market is rising. On the other hand, if the market is moving downwards, it is referred as a ‘Bear Market’. The terminologies (bull vs bear market) are applicable from the way in each of these animals attack their opponents. In respective scenarios, the bull will thrust its horns in the air whereas a bear will stamp its paws down on its prey.
A Bull market is when the economy is very smooth, GDP of the economy is rising and job creation is also on the rise. Selection of stocks is easier in such a scenario as the overall health is stable. If an investor is optimistic then they are said to have a ‘bullish outlook’.
A Bear market is the opposite and economy is under a recessionary phase over a long period of time and stock prices are plummeting rapidly. Stock selection becomes very difficult and investors focus on making money by selling of stocks (short selling). Though one with a pessimistic opinion is called as someone with a ‘bearish outlook’, many anticipate such a situation to be temporary and indications of revival stage being around the corner.
In this article, we look at the key differences between Bull Market vs Bear Market
- Bull Market vs Bear Market Infographics
- What is Bull Market?
- What is Bear Market?
- Bull Market vs Bear Market – Key Differences
- Bull Market vs Bear Market (Comparison Table)
- Conclusion – Bull vs Bear Market
Bull Market vs Bear Market Infographics
Below Infographics on Bull Market vs Bear Market will provide you with a bird’s eye view of the key differences.
What is Bull Market?
This situation is defined as a marketplace whereby the prices of listed securities are continuously rising due to favorable macro economic scenario or improved internal circumstances of the firm or sector. In general, the terminology is applicable towards stocks but it does also get referenced to other asset classes such as Bonds, FOREX, and Commodities etc. Since the laws of demand and supply influence the market, prices in financial markets will increase when the supply of stock falls and vice-versa. Certain important facts are:
- Bull markets are preceded by Investor confidence, positive expectations and general optimism in the market
- In the initial stages, most of the market changes are psychological and may not necessarily be accompanied by strong economic information or Corporate earnings.
- In the derivatives market, there will be a huge demand for Call options since the overall sentiment is upbeat and positive.
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 bearish 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 indicators performing at above average levels.
- In the third phase, market indexes and securities touch new trading peaks. Security trading continues to rise and dividend yields fall low indicating sufficient liquidity in the market.
- In the final phase, IPO activities are high along with Trading and Speculation. Stock P/E ratios 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 and the precise timing of its entry and exit cannot be predicted. The investor must know when to buy and sell for maximising 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 which bought in Consumerism in the USA, easy availability of credit facilities and increased opportunities for leverage. The situation was so optimistic that stocks were purchased on Margins i.e. stocks purchased on loaned money.
What is Bear Market?
Such a situation depicts a downward trend in the market over a period of 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 lot of money as security prices will fall across the board and investor confidence is also expected to take a hit.
The characteristics and causes of a bear market will vary as per circumstances but the economic cycles and investor sentiment play a pivotal role in the anticipated direction and how long is it expected to last. Some of the indicators of a weakening economy are:
- Low employment opportunities
- Less Disposable income in the hands of the general public
- Declining business profits
- Existence of several new trading lows and troughs
- Short selling or increasing use of Put options
- Unprecedented 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 is 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 economic indicators are not performing as expected. The confidence of investors heads towards pessimism and can create a situation of panic. Market indices and a large number of securities reach new trading lows and dividend yields also become very high. This is an indication of more money required to be pumped into the system.
- The third phase highlights the entry of speculators in the market with prices and trading volumes continuing to rise.
- The last phase indicates further downfall of stock prices but at a slower pace. This is considered as a point of the lowest ebb and investors start believing the worst may be over and positive reaction starts flowing in with bear markets eventually giving way for the bullish outlook to re-enter.
A prominent example of a Bear Market is the recession which was followed by the Wall Street stock market crash of 1929. The investors were struggling to exit the market with sustainable losses getting incurred. For preventing excessive losses, investors continued selling their stocks causing a further decline and market collapsed on October 29, 1929 followed by a sustained depression in the economy called as the ‘Great Depression’. The Dow Jones Industrial Average declined by almost 90% through 1932.
Bull Market vs Bear Market – Key Differences
Despite the terminologies being used in tandem while explaining the concepts, the differences of both these scenarios – Bull Market vs Bear Market are stated as 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 outlook of the investor is very optimistic and this is visible from the fact that investors will be taking long positions in the market. This way, the anticipation is security prices will rise further and investor has an opportunity to maximise profit opportunities. Conversely, in a bearish market, the market sentiment is quite pessimistic and reflected by investors taking a short position 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 whereas 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 (bull vs bear market), an indicator like the GDP (Gross Domestic Product) plays an important role in giving a bird’s eye view of how the economy is performing based on the existing factors.
- In a bullish market, the market indicators are very strong. These indicators are used in technical analysis for forecasting market trends and various ratios and formulas which explain current gains and losses in stocks and indexes and its expected movement in the future. For e.g. the market breadth index is an indicator measuring the increasing number of stocks versus those which are 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 (bull vs bear market), the causes are interdependent and 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 and at a rapid pace if the situation is not improving.
- In a bullish market, the liquidity flowing in the market is very large and investors continue to pump more funds with increased trading activity and investing in stocks, gold, real estate etc. but in a bearish market, the liquidity dries up in the system 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, though, in a bearish market, IPO’s are avoided since investments would not be encouraged and people will prefer to hold on to the existing positions and liquidity.
- International investments will automatically get encouraged in a bullish market with the intention 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 the 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 policies by the Central Bank and the Government. Conversely, in a bearish market, the banking sector will curb the usage of money for emergency situation 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 security others can receive on investment made whereas, in a bearish market, these yields shall be very high indicating requirement of funds and attempting to lure investors by offering higher yields on securities at a later date.
Bull Market vs Bear Market (Comparison Table)
|BASIS OF COMPARISON – Bull Market vs Bear Market||BULL MARKET||BEAR MARKET|
|Definition||Situation when market is rising up||Scenario when market is falling down|
|Stock Price/Trading – Bull vs Bear Market||Increasing||Decreasing|
|Stock Positions||Long position||Short Position/Short selling|
|Expectations – Bull vs Bear Market||High with longer stability||Low expectation with less stability|
|International Investments||Encouraged at a Faster Pace||Stable or a Receding approach|
Conclusion – Bull vs Bear Market
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 at some point since these situations are inseparable. In statistical terms, the market is said to be bullish when the rise of 20% in the performance of the stock market is observed. On the contrary, if the downfall of the stock market of 20% or more is noticed, then a situation of the bearish market is highlighted.
Investors will direct their investments basis various factors which define the outlook through which the market is going through. The entry and exit of the investor get impacted and hence investor sentiment plays an important role in defining how long bullish or bearish outlook exists. One cannot escape withering of the scenarios and thus a judgmental call has to be taken before making investment and patience should also be held to go through choppy market conditions as well.