Bear And Bull Market Explained

In describing the nature of the stock market, we often hear the words Bear and Bull market. Usually, these two words are used to describe the general market condition of either an individual asset or the market as a whole. The two terms are also used by investors to describe their market sentiment towards a particular stock or asset. What then is a bear market and a bull market?

A bear market is a term used to describe a decline in the market value of a single asset, stocks, securities, or the financial market as a whole. In contrast to this, the term bull market is used to describe a rise in the market value of assets and securities. This implies that the two words are opposite. In the bear market, the market keeps moving down quarter after quarter for about 20% in value. Investing during this period is not usually advisable as many equities lose value and price becomes more volatile. Hence, during this period, investors would rather sit on their money than invest. This action further contributes to the downward spiral of stock value and the country's economy as a whole.

Origin Of The Name Bear And Bull Market

In the United State, although it is simple to understand what a bear and bull market are, the impact both cases have on the investors' portfolio cannot be underestimated. Literally, Bear and Bull are very strong animals, hence their impact in the market rings true of their strength.  

The actual origin of the two names is quite unclear, however, the popular explanation often given as the reason for the name is in the way both animals attack during a fight. The two names bear and the bull is used to describe the market inflation and deflation. The names are gotten from the way both animals use their horns whenever they want to attack. For instance, when a bear wants to fight, it swipes its two horns downward while the bull thrust its two horns upward. These two actions become a metaphorical way of describing market inflation and deflation. If the market is trending downward, it is a bear market and if it is trending upward, it is a bull market. 

Another history surrounding is that, in the early days, the middlemen who are into the sales of bearskin would sell the skins of bears they are yet to receive. As such, they would speculate on the future price of the bearskin from the trapper hoping that the price would drop. When it does, they buy from the trapper at a price cheaper than they had sold. The trapper would benefit from the spread or difference in the cost price and the selling price. The name stuck with the middlemen and they became known as bearskin jobber. 

After a while, the name bearskin jobber became shortened to bear, and its meaning or interpretation was extended to include the financial market. Also in 1709, Richard Steele, the publisher of the British literary and society journal titled "The Tatler" Steele defines a bear in one of the essays in the journal as a person who places too much value on an imaginary object. As such, the person is said to be selling a bear.  

This negative view of the bear continues and was reiterated in one Daniel Defoe’s book published in 1726. Defoe states that “…every dissembler, every false friend, every secret cheat, every bearskin jobber has a cloven foot”

However, because bear and bull are considered as two opposite animals as a result of the myth surrounding them, the opposite of bear market became known as a bull. When a bull is used to describe a market condition, it is often used for positive connotations. A bull market means that the market value is on the rise, in the same vein, a bull speculator implies the speculative purchase is made with the hope of an increase in the price of the stock.

Nevertheless, among these two histories, the one that seems believable and often used as the history behind the United States bear and bull market is on the way the two animals attack their opponents.

Features Of Bull And Bear Market.

Some of the features to consider during a bear and bull market include;

• Supply and demand for securities often increase during the Bull market. This is because, with the swing in the price of the stock, investors are willing to invest however, only a few companies are willing to sell. This further contributes to the upward spiral of the price of stocks. 

Conversely, the bear market is often accompanied by situations whereby companies are willing to sell but only a few investors are willing to buy. This further heightens the downward spiral. A bear market can get so bad that unemployment will take a swing as companies start laying off their employees.

• Market sentiment

Market sentiment refers to investors' psychology. It is an overview of investors' behavior to the price or value of stocks. For instance, the sentiment of the investor during a bear and bull market is not always the same. In a bull market, the investor is positive that they would make a good return on investment, hence they invest more but in a bear market, the investors' market sentiment is negative. At this time, investors would rather invest their money in equities and into fixed-income securities while they wait for a positive change in the declining value of the stock.

• Change in economic activity

Since the stock market and the country economy are closely linked a change in the stock market affects the overall economy of the states. A bear market leads to a decline in the economy of the state. It results in a weak economy as people are not willing to spend or invest. Businesses are also affected because consumers don’t have enough money to spend or are not willing to spend. 

In the case of the bull market, the reverse is often the case as people are more willing to spend their money. This in turn drives the economy forward. 

What To Do During Bear And Bull Market

It is advisable for an investor to take advantage of the rise of the value of stocks during a bull market. Investors are advised to buy as much stock as possible and resell when the price of stocks get to its peak. Usually, any losses incurred during this period are often temporal and minor. An investor can confidently invest in more equity with a higher probability of a good return.

However, this is not the case with a bear market. In a bear market, the chance of losing more money is greater because of the continuous drop in the price of stocks. Even if you decide to invest in the hope for an upturn, there are chances that you would lose more money even before the expected turnaround. The only way investors can make money during a bear market is to engage in short-selling or any safe investments like a fixed-income investment. 

Other investment investors can engage in during bull markets are defensive stocks. These are the types of stocks that are not too affected by the decline in stock value. They include industries owned by the government.