Breaking down the basics

Think about a bull attacking its rival with its horns thrust upwards; that is what exactly a bull market is – a market that is on the rise and belligerently so. On the other hand, a bear attacks with its paws swiping down the opponent; likewise, a bear market defines a market that is on the fall.

What is a bull market?

This refers to a market that is marked by security prices being on the rise, or at least anticipated to go up over a particular period of time. With most conditions being conducive to purchasing securities, a bull market typically motivates the investor to kick start the buying process. Increased optimism, higher volumes of trading and returns, and reinvigorated investor confidence form the contours of such a market. Investors who anticipate a rise in stock prices are referred to as ‘bulls’ and their sentiments ‘bullish’.

The bull market lifecycle

First stage:

Revival from pessimistic market sentiments left behind by the preceding bear market

Second stage:

Revival of corporate earnings, a gradual yet steady rise in trading volumes, increase in stock prices and economic metrics pointing at above-average levels

Third stage:

Peaking security prices and market indices, and continual rise in trading volumes

Fourth stage:

High Initial Public Offering (IPO) activities with stock prices at an all-time high

What is a bear market?

This kind of market is characterized by security prices on a consistent downward spiral. Pessimism pervades a bear market and that is precisely because most investors occupy a short position – something that stems from the fear that holding securities in such a market would only yield losses.

A fall in stock trading, declining returns and low investor confidence are some of the major highlights of a bear market – one that is often considered a fallout of a downturn in the economy. Investors who anticipate a fall in stock prices are called ‘bears’, and their sentiments ‘bearish’.

The bear market lifecycle

First stage:

Remnants of positive market sentiments (from the preceding bull market) but investors gradually exiting the market after having sold off securities at maximum profit levels

Second stage:

Rapid decline in stock prices, nosediving trading volumes, prevalent pessimism and economic indicators performing at below-par levels

Third stage:

Further dip in stock prices but at a slower pace. This is perceived as the lowest point in the ebb with investors starting to believe that they have finally weathered the bearish storm

Bull market vs bear market – Key differences

Differences between the two can be clearly drawn along the following grounds:

Definition

While a bull market grows aggressively over a particular period of time, a bear market is marked by a consistent fall on a month-on-month basis.

Outlook

Positive outlook pervades a bull market whereas its bear counterpart is permeated by pessimism.

Position

In a bull market, investors occupy a long position; that is they buy securities in the hope of selling them at a profit when prices go beyond the contracted rate. On the other hand, investors occupy a short position in a bear market; that is they sell off their securities and start quitting the market.

Stock prices

While a bull market is marked by high and rising stock prices, a bear market, on the other hand, is one that exhibits a steady nosedive in prices of securities.

Trading volumes

Volume of stocks traded is high in a bull market, whereas the figure is considerably low in a bear market.

Market indicators

Market indices and economic indicators perform at above-average levels in a bull market. Conversely, a bear market is defined by below-par economic indicators.

In conclusion

Should a market fall by 20% or more, it is usually considered to a bear market. Irrespective of whether the market is in a bullish or bearish phase, you must not lose sight of your goals and stay invested till they are achieved.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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