All You Need to Know about Differences between Bull and Bear Markets

Stock markets worldwide undergo periods of very high growth in stock prices and dramatic decline in benchmark indices. In stock trading terminology, these periods are called bullish and bearish markets. Traders utilise market situations and manoeuvre their strategies to earn profits. Read on to understand the key differences between a bull and bear market. 

What Is a Bull Market?

A bull market refers to a period in which there is a continuous increase in the price of stocks, bonds and commodities over an extended period. A bull market is nothing but an investor sentiment or perception about confidence in the economy. 

Even an increase in real estate prices comes under the bull market phenomenon. If the market sentiments are positive, it will lead to increased demand and buying of tradable assets. This will make the bull run stronger and extend its lifespan. 

Indicators of a Bull Market

Here are some indicators of a bull market:

• GDP or Gross Domestic Price

Whenever a country’s GDP grows exponentially, consumers spend more. The country is producing more goods and services. This signals a flourishing economy and the emergence or sustenance of a bull market. 

• Stock markets

Whenever the stock markets are seeing growth in their benchmark indices and investors are pumping in money, it is a key indicator of a bull market or bull run in the stock market. This is because you will see huge inflows from foreign and institutional investors during a bull run, thus inflating the stock prices. 

How Long Does a Bull Market Last?

There is no stipulated deadline or timeframe for which a bull market must run. It depends on various micro and macroeconomic factors as well as geopolitical events. Bull markets last for several weeks or months, while some continue for years. The fundamentals of the companies also play an important role in the timeline of a bull market.

If companies are earning more, then it is normal for their stock price to rise, thereby giving more impetus to a bull run. The Indian stock market has seen several bull runs. The most recent bull market was seen after economic recovery from the effects of the COVID-19 pandemic. 

What Is a Bear Market?

Bear markets are the complete opposite of a bull markets. Whenever there is a significant fall in stock prices from their near high over time, markets are considered bearish. It occurs when there are recessionary trends in the economy as a whole. 

The bear market also means that consumers have less disposable income and are spending less. It directly affects the performance of companies, leading to a fall in their stock price. 

Bear markets exhibit very low confidence in an economy. Hence, investors pull out their money and look for safer investment options. 

Indicators of a Bear Market

Indicators of a bear market are as follows:

• High unemployment rate

A high unemployment rate in the country is a clear marker of bearish sentiments in or prevailing in the economy. Companies earnings are hit, so they have no option but to lay off their employees. 

• Low GDP or recession

Any recessionary economic trend clearly shows bearish sentiments. Whenever an economy is witnessing very low or negative GDP growth, it is bound to see a fall in the market capitalisation of companies and a resultant fall in their stock price. 

How Long Does Bear Markets Last?

Again, there is no clear timeline or timeframe of how long a bear market will last. It depends on the economy’s overall health and other external economic and geopolitical factors. Some bearish sentiments last for several months, while others may run for years. 

Differences between a Bull and Bear Market

Here are the differences between a bull market and a bear market:

How to Invest in Bull and Bear Markets?

It is common for individuals to ask, “how to invest in stock markets during bullish and bearish conditions?” There is no definite answer to this question. The decisions taken during a bull and bear market vary greatly. You must create a sound financial plan before investing your hard-earned money. 

Individuals should have more stocks in their portfolios during a bull market to maximise their returns. One can also go for growth stocks as there are chances of earning more from these stocks in a bull market. 

On the other hand, in bear markets, one has to be more careful as there as chances of incurring significant losses. Suppose you want to invest in stock markets. However, many experts believe that it is wise to invest in fixed income securities during bearish market conditions is wise. The most important principle of investment is that you must not panic or take emotional decisions based on market situations.

Key Differentiation Points In Relation To Bull And Bear Market

Although the terms are used in conjunction to clarify the concepts, the differences between the two scenarios are described below:

• When the market is performing well and the overall market environment is favourable, the market is said to be in a bullish state. When the market’s performance is deteriorating, it is said to be in a bearish market. A bullish market indicates that investors have a very positive view, as seen by the fact that they will be holding a long position. In this scenario, there is a likelihood that asset prices may increase further, giving investors the chance to increase their chances of making a profit. In contrast, in a bearish market, investors take a short position, selling an asset or taking on a put position with heightened anticipation of a declining market, reflecting the market’s generally pessimistic outlook. As a result, the option holder will record a profit if the price drops below the stipulated price.

• The economy expands steadily while the market is bullish. In contrast, in a bearish market, the economy will either contract or grow more slowly than it would in a scenario with an optimistic forecast. In each of these scenarios, an indicator like the GDP (Gross Domestic Product) is crucial in providing a top-down assessment of how the economy is performing given the current circumstances.

• Market signs are strong in a bullish market. The different ratios and formulae that explain the present gains and losses in stocks and indexes as well as their anticipated future movement are utilised in technical analysis to forecast market movements. E.g. the market breadth index tracks the ratio of rising stocks to declining ones in the stock market. If the index is more than 1.0, it predicts a future increase in market indices; if it is lower than 1.0, the opposite is true. The market indicators are weak during a bear market. Both of the instances have interdependent causes, and the same cascading impact is seen in both.

• In a bullish environment, the job market is quite promising and the general people has greater disposable income. However, in a bad market, competition for jobs is fierce, and if things don’t get better quickly, efforts are made to reduce spending.

• A bullish market has a lot of liquidity flowing through it, and investors keep pumping money into stocks, gold, real estate, and other investments while trading more frequently. In a bearish market, however, the system’s liquidity dries up and investors are hesitant to commit. In a bullish environment, investments are either sold to avert additional declines or held back for use in the future. It might lead to instances of hoarding and black marketing.

• In a bullish market, IPO activity is encouraged since investors are eager to invest more money and the market attitude is strong. However, IPOs are avoided in a bearish market since consumers would rather hang onto their existing positions and liquidity and investments would not be promoted.

• In a positive market, international investments will automatically be encouraged to increase the size of the current portfolio. For instance, if India is experiencing a bullish phase and South Korea decides to make generous investments there, such a move will encourage a smooth phase for India, improve the investment made by South Korea, and subsequently boost the economy for South Korea. This will spread the effects of a bullish market across borders. International investments, however, could not be a good alternative for other nations in a gloomy market, and such a move might be delayed to a distant time.

• A bullish market will push the banking industry to lower loan interest rates, promoting the increase of economic activity and the need for expansionary government and central bank policies. On the other hand, in a bear market, the banking industry would limit the use of money for emergencies, which will force the top authorities to enact contractionary policies. Loan interest rates would either stay the same or go up.

• In a bullish market, the yields on securities and dividends will be low, highlighting the investor’s financial stability and the security others can receive from the investment made. In a bearish market, however, the yields will be extremely high, signaling the need for capital and the attempt to entice investors by offering higher yields on securities at a later date.

Final Word 

In this blog, we have discussed key differences between bull and bear markets and how you can maximise your gains. Investors looking to put their money in stock markets must do so only after creating a sound financial plan with the help of a financial expert, as one bad decision can lead to significant losses.

FAQs

• What are growth stocks?

Growth stocks are expected to rise more than the average market growth rate. These are small companies having tremendous potential to grow over some time. As a result, it may give high returns to investors. 

• What are value stocks?

Value stocks trade at a lower price about their fundamentals like revenue, profitability, etc. 

• What are market corrections?

At the time of market corrections, the price of stocks falls by a small amount for a brief period. Market corrections are a regular phenomenon and frequently occur, unlike bearish conditions.

Interested in how we think about the markets?

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