There are a lot of terms that are used in Equity or Share markets. Some of these terms might be confusing to people who are just starting to invest their money in shares or plan to do so. Not just the advanced terms like stop loss and margin can be a challenge at the beginning, but also the terms defining different trends in the market could prove difficult as well. Two such terms are Bull and Bear. Both these are the most popular share market terms, and define the sentiment of the investors and performance of the overall market. To better understand both the terms and their usage, we need to understand the differences between the bull market vs bear market.
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Bull Market vs Bear Market – Meaning
We use the term bull market when the market is making highs and share prices are moving up. This phase denotes positive investor sentiment, economic growth, profit for companies and so on. During the bull phase, investors are positive about investing in the equity for better returns and the market rewards them fairly.
Bear market, on the other hand, is the exact opposite of the bull market. During the bear phase, investor sentiments are negative, the economy may not be in good shape, and GDP numbers may be dropping. As a result, investors panic and start to withdraw their funds from the share market to invest in safer options such as Fixed Deposit (FDs) and Gold. Not just the retail investors, but institutional investors also start to pull out funds from the share market, leading to a drop in the share prices.
Bull Market vs Bear Market – Differences
Following are the differences between the bull market vs bear market:
Bull market occurs when the share prices and the overall market is moving up. On the other hand, the bear market is the time when shares are not performing well and people are growing pessimistic about the market.
Origin of Terms
Both the terms come from the behavior of two animals when they attack. For instance, bull attacks by swinging its head upwards. This depicts an upward swing in the stock market. Bear, on the other hand, attack downwards, depicting downward price movement.
Indicators of Both Phases
There are inherent signs in the economy for the start and end of both the phases in the market. During the bull market, one would notice that the GDP (Gross Domestic Product) of the country will grow and the unemployment rate would go down. Most of the sectors that contribute majorly to the GDP of the country perform extremely well and relish positive outlook from the analysts.
Bear market, on the contrary, will see declining GDP numbers, rise of unemployment, poor outlook of the major sectors and dropping investor confidence in the high-risk return instruments such as equity. Some of the notable examples of bull market phase are the period between 1980s-2000 and Post World War II from 1940s to 1950s. Global economy has also seen bear market phases like The Great Depression in 1929 and the dot-com bubble in 2000s.
Type of Order
Investors can both buy and sell in the share market irrespective of it being a bull or bear market. However, during the bull market, the market usually sees more buy orders, while the bear market sees more sell orders. During the bull market, investors expect the share price to increase, and therefore, they start buying the shares.
On the other hand, bear market sees more sell orders as people are looking to make money by shorting stocks. Shorting means people are expecting the price to go down, and therefore, borrow the share from broker to sell it. And, when the price starts falling, traders or investors start to make money.
Type of Securities
During bull market securities that give more return for taking more risk do well. On the other hand, during bear market securities that are less risky do well as people have lower expectations.
Monetary and Fiscal Policy
During the bull phase, interest rates are high and govt. tries to impose more tax to limit the disposable income in the hand of the consumers. During the bear phase, the central bank tries to lower the interest rate and tax to boost consumer spending and CAPEX (Capital Expenditure).
Also known as leverage trading, margin trading occurs when investors buy the quantity of shares that they can’t afford at a certain price. As a result, the broker lends funds to investor to facilitate the buying of the share. During the bull market, when there is a better chance of share prices going up, investors follow margin trading strategy aggressively. Traders are optimistic about the return and believe they can earn the profit with this strategy.
However, taking the same leverage could be risky when there is no positive momentum in the market or in other words during the bear phase. The experts always suggest limiting the margin trading during the falling market as it could widen the loss in case the share price starts dropping.
Contrary to the belief, option trading is likely to earn more profit during the bear market. This is because volatility in the market is usually high during the bear phase, increasing the chance of directional profit.
Whether or not the market enters the bull or bear phase depends on number of macroeconomic factors. And, every country and market usually goes through both the markets continuously. Normally, the market is said to be in bull phase when the stock market moves up by 20% or more. On the other hand, the bearish phase is said to start when stock market moves down by 20% or more. Investors need to follow a different strategy in each phase to make returns.1–3