Are you planning to start investing in the stock market? If yes, then there are various things that you should know before planning to do so. Starting from the basic courses for individuals and beginners to understanding the terminologies, there are multiple things that you should be aware of. While most investors start with exploring the tools and techniques to invest in the market, they fail to understand the basic types of the market, which are bull market vs bear market.
So, let us explore the bearish and bullish market concepts here. But before we start, here is an interesting fact for you all.
A bull and bear statue is located in the front of the Frankfurt stock exchange. The bull stands tall, which is the sign of rising, while the bear faces downwards, which is the sign of fall. Now, you must have a basic idea of the bull and bear market. Well, let us explore more here.
About Bull Market
For those willing to work in the stock market or financial market, the bull market is quite a common term that you should know. It is called a bull market when stock prices have risen by at least 20% since the previous market slump. Bull market conditions can endure for decades, and many successful investors have made poor predictions about when a bull market will expire.
When investors believe that prices will begin to climb and then continue to rise, they tend to buy and retain stocks hoping that they are correct. In a self-fulfilling prophecy, it is where investors create market circumstances based on investors’ beliefs about stock prices that influence the prices themselves. Bull markets usually occur during periods of strong economic development, when investor confidence is high, unemployment is low, and economic output is high.
After rebounding from the 2008 financial crisis, the stock market in the United States was bullish until pandemic-related anxiety prompted a market meltdown in 2020.
About Bear Market
A bear market is defined as a period in which stock prices fall by 20% or more and continue to fall. People lose their jobs, the economy shrinks, and the stock market plummets. These are all signs of a bear market. When a bear market starts, investors’ confidence in the market plummets, and they believe prices will continue to decline, prolonging the negative spiral. Bear markets have a shorter lifespan than bull markets.
Companies begin laying off people during the bearish phase, resulting in a rise in unemployment and, as a result, there is an economic slowdown. Rather than buying into the market, investors are looking to sell, preferring the safety of cash or fixed-income instruments. As a result, it’s a buyer’s market. Bear markets can last anywhere from weeks to years.
The Great Depression was the first and most well-known bear market. Other instances include the dot-com bubble of 2000 and the housing crisis of 2007–2008.
Factors Making A Market Bearish Or Bullish
Though bear and bull markets are both market phases understanding the factors that cause them is very important. We know that changes in the market movement create the buyer or seller market, but what factors define the reason for a market to be bearish or bullish.
Well, the most prominent factors that create a bearish or bullish market are listed for you here:
1] Supply and demand
If you are a new investor planning to study the stock market, this is the first thing to know. Supply and demand play a crucial role in the business. While an increase in demand is beneficial for the business, an increase in supply is beneficial for the customers.
Before understanding how demand and supply link to the bear or bull market, let us understand the concept with an example. Suppose there is a demand for 100 bags in the market and the supply available is for only 80 bags. Now in this scenario, the seller has the opportunity to increase the prices and match the demand until new bags are produced and delivered to market. The seller can quote INR 100 and gain higher profits. Now, let’s take the opposite scenario. The market has a supply of 100 bags available, but there is demand for only 70 bags. Now, it’s up to the negotiation power of the customer to get the best deal. Here the business profit will reduce.
Now, let’s consider bear and bull markets to understand the supply and demand.
Strong demand for securities and a lack of supply characterize a bull market. Many investors want to acquire stocks, but only a few want to sell them. Share prices rise as a result. On the other hand, in a bear market, demand is much lower than supply since more individuals want to sell than buy. Share prices fall as a result.
Buying stocks early in a bull market, watching them climb in value, and then selling them when the market reaches its peak is the ideal strategy for an investor. Short-selling or switching to safer investments, such as fixed-income securities, can be profitable in a bear market when the likelihood of losses is higher.
2] Economic environment
One of the most important factors that impact the prices of the shares is economic activities. In a bull market, business earnings rise, and the economy expands due to the wealth effect, which causes consumers to spend more. During a bull market, trading and IPO activities grow as well.
On the other hand, in a bear market, consumers tend to set tougher priorities and cut down on their spending, resulting in reduced sales and profits for businesses. This, in turn, impacts the way the stock market values stocks, resulting in a negative impact on GDP.
3] Change in GDP
Understanding the GDP is equally important when looking to understand the bearish or bullish market. A rise in the GDP is linked to the bullish market, while a fall in GDP is linked to the bearish market. The most common reason for the fall in GDP is recession or depression. Recessions are officially proclaimed when GDP falls for two quarters, whereas depressions occur when GDP falls by 10% or more for at least two years.
A recession reduces the purchasing power of the people, and this is the time when investors prefer to keep their cash with them rather than invest it in meeting the unforeseen scenario. Take, for example, the COVID 2020. Due to the various restrictions, various businesses failed, which led to falling in various stock prices. Though this was not a recession to some extent, the period created a bearish market. While post revival of international trade, the market is uplifting, which is a sign of the bullish market.
4] Unemployment rate changes
In a bull market, the unemployment rate is dropping, whereas, in a bear market, the unemployment rate is rising. Businesses develop and hire during bull markets, but during downturn markets, they may be obliged to reduce their workforce. A rising unemployment rate extends a bear market since fewer people working means lower revenues for many businesses.
5] Investors’ psychology
This is indeed one of the factors that are mostly overlooked but are quite crucial for investing. People have their viewpoints about the market. The emotions and the movement of the investors also impact the stock market greatly. In a bull market, rising stock market prices raise investor confidence, causing them to deposit their money into the market to make a profit.
In a bearish phase, however, investor mood is negative. They begin to shift their money out of equities and into fixed-income instruments in anticipation of a positive stock market advance.
What To Do When investing For Long-Term Success?
The market is uncertain, and you cannot predict it with 100% accuracy that is true. So, you might be thinking about what can you do to avoid uncertain scenarios. The best solution to invest for long-term success is to diversify your portfolio. In simpler terms, rather than investing your 100% funds in the stock market, try to invest in various options like fixed assets, gold, or others that can offer you funds in case of uncertainties and emergencies.
But what can you do to invest smartly? The best way is to start learning about the various options with the help of the resources available. You can visit the online platforms and read books like Money Smart by Zebralearn or even tackle the fund manager’s assistance for the best portfolio creation based on your risk appetite.
When investing in the market, it is very important to understand the concept of a bearish and bullish market to avoid losses. Knowing the factors that create the bearish or bullish market and understanding the signals can help you make the right move at the right time and safeguard yourself from losses. Also, remember that past performance is no guarantee of future results but rather an indication based on which your strategy can be based.
While bull markets exist in other asset classes, the stock market can be bearish, and vice versa. If the stock market is rising and you’re worried about price inflation, investing in gold or real estate could be good. If the stock market is down, you might consider shifting more of your portfolio to bonds or even cash.
It’s critical to be focused on the long-term potential of the firms in which you invest, regardless of the current situation of the stock market. So, consider all the factors to have a robust and effective investing strategy.