Difference between Bull and Bear Market

Introduction

Stock markets are neither static nor linear. These markets undergo a cycle of rising and falling stock prices. So, to describe the booms and busts of a financial market, terms, such as bull and bear market are used. It is a bear market when the stock prices fall and a bull market when the prices go up.

What is a bull market?

A bull pushes its horns high up in the air while attacking. So, in financial terms, a bull market means a consistent rise or expected rise in the stock prices for months or even years. A bull market is the period of strong gains in the stock prices. With a rise in stock prices, the investors feel optimistic about the future performance of the market and buy more stocks.

Bull market indications

There are no specific ways to identify a bull market scenario, but certain indications may predict a bull market:

Overall stock prices rise:

A consistent rise in stock prices for a prolonged duration leading to an optimistic outlook of investors is a major indication of a bull market. There are many investors who wish to purchase stocks with fewer people selling them. With a rise in demand and a fall in the supply of stocks, prices rise.

Economic growth:

The businesses that are involved in the stock market are part of the economy. So, during the time of economic growth, businesses make more profits leading to a rise in their share price. With the increased value of businesses, more investors are willing to invest and a bull market occurs.

Psychology of the investors:

There is a direct relationship between investor psychology and market performance. In a bull market, the investors have a positive sentiment and they willingly buy stocks in the hope of earning profits. As a result, stock prices rise.

Growth in employment rate:

As stock prices rise, businesses grow and generate more employment. So, a bull market is also indicated by a growth in employment rates.

Increase in numbers of IPO:

Due to the bullish trend, more companies approach the market to raise funds, increasing the no. of IPOs hitting the market.

A bull market provides good opportunities to investors as profit-making is on the rise. However, with the unpredictability of the market, you should know when to buy or sell the stocks. Also, ensure you create buffers to sail through downfalls.

What is a bear market?

A bear attacks with its paws and nose pointed towards the ground. So, a bear market is contrary to a bull market where the stock prices are on a consistent decline or are expected to decline for a prolonged duration. The bear market scenario is coupled with a pessimistic outlook of the economy. With low market confidence, investors start selling their stocks in fear of further drop in prices.

Bear market indications

A bear market is inevitable and every investor should prepare for it in advance. Some of the indications of a bear market are:

Steep fall in stock prices:

In a bear market situation, more investors sell stocks with fewer people willing to buy them which leads to a further fall in stock prices. With less demand and more supply, the stock market faces a downfall.

Decline in economic growth:

During an economic crisis, businesses are unable to make profits due to less consumer spending. Therefore, the decline in profits leads to a decline in the market price of companies’ stocks.

Psychology of investors:

A bear market has a negative market sentiment. The investors sell stocks leading to a further decline in investor confidence causing the stock prices to fall radically.

An increase in the unemployment rate:

Due to less demand, companies lose out on businesses and carry out employee layoffs. This causes high unemployment rates, further impacting the economy and stock prices.

Fewer number of IPOs:

Due to a fall in the prices, companies command less valuation and the market is no more attractive for raising capital. Companies may not get the proper valuation of their stock, so fewer companies come up with IPOs in a bear market.

A quick sum up

How to invest during a bull or bear market?

Rise and fall in the stock prices are a regular cycle. Neither a bull nor bear market situation is permanent. So, you must invest in safe assets during a bear market and diversify your portfolio to avoid losses.

Moreover, you would like to sell your stocks during a bullish market due to high returns. On the other hand, during a bearish market, you would like to sell off the investments due to the possibility of a further dip in prices. However, experts suggest that you react to the market fluctuations as less as possible and leave your investment portfolio alone for the long term to make higher returns. Also, it is wise to buy more stocks during a bearish market due to cheaper valuations and low prices.

Conclusion

Now you understand the difference between bull and bear markets and how these markets impact the economy and investor confidence. The highs and lows of a financial market are inevitable, and no financial analyst can predict them accurately. It is easier to invest in a bull market situation but to sail through a bear market, the best way is to stay afloat by investing the right way.

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