‘Market crash ho gayaa’ (Translation: The market has crashed) is a term that strikes fear in the minds of every investor. When you turn on the news channel, all you can see are terms like the market, economy, bull market, bear market, etc. So, what exactly is a Bull and Bear Market. I will be explaining what these markets are, their characteristics and what one should do in each of the market scenarios.
Overview of Bull and Bear Market
When it comes to the investing world, the terms ‘bull’ and ‘bear’ are often used to determine the market conditions based on whether the price movement is positive or negative. When analysts use the term ‘bullish market’ and ‘bearish market’, they are describing whether the market is being optimistic (likely to rise) or pessimistic (likely to fall). Both these terms are a sentiment or mindset adopted by a trader. Bullish sentiment is where they think the price of the securities will go up and bearish sentiment is where they think the price of the securities will go down.
The terms bull and bear are derived from the way in which each animal attacks its opponents . Whenever a bull attacks, he will thrust its horns up into the air. Hence, any positive movement in the market is referred to as a bullish market. Whenever a bear attacks, he will swipe down with his paw to hit his opponent. Hence, any negative movement in the market is referred to as the bearish market.
Characteristics of Bull and Bear Market
First things first, you can make a profit in both bullish and bearish markets. Let us look at what makes the market bullish or bearish. Investors should be aware of these aspects as well.
- Supply and Demand
In a bullish market, there is a strong demand low supply of securities. This means that many investors are looking to buy securities but not a lot are willing to sell them. This results in an increase in the price. The investor should try and enter the bullish market at an early trend and sell when the securities reach their peak. In the bear market, it is completely the opposite. In a bearish market, the demand is very low, but the supply is strong. So, not a lot of people are willing to buy but there are many investors who are willing to sell. This leads to a decrease in the prices of securities . The investors can profit from Short Selling, putting options, or choosing safer investments such as fixed deposits.
- Change in Economic Activities
The stock market and the economy are strongly linked together. In a bullish market, the earnings increase, and the economy grows as people are willing to buy goods and services more often. This leads to more wealth and growth of the economy. On the opposite hand, in a bearish market, consumers set stricter policies and reduce their spending which leads to lower sales and a fall in business profits. This consequently results in falling of the prices and a negative impact on the GDP
- Investors Psychology
Market behaviour is impacted by how individuals perceive and react to the market’s performance. It is the psychology of the investor which determines whether the market will rise or fall. This means that the stock market performance in the psychology of the investor is mutually dependent. Hence investors more willingly participate in a bullish market in the hope of obtaining a profit.
In the case of a bearish market, the market sentiment and the investor’s psychology are negative. Investors begin to move their money out of the equities into fixed-income securities. The decline in the market performance shakes the confidence of the investor. This causes the investor to keep their money out of the market, which consequently results in causing a general price decline as outflow increases.
Things to be done in each market
As previously mentioned, you can make a profit in both bullish and bearish markets. Let us look at how this is possible. During a bullish market, the investor should take advantage of the rising prices of securities by buying stocks early at the start of the trend, if possible. They can then sell them when they have reached their peak. One should note that perfect timings in the market are almost impossible. During the bull run, the investor should make sure that his losses are minor and temporary.
In the bearish market, the chances of losses are significantly higher because the prices are continuously falling. Even if you invest with the hope of an upside, you are more likely to face a loss. In such scenarios, one should turn toward Short Selling, or think about safer investments such as fixed-income securities i.e., FDs. The investor can also turn to the stocks whose performance is not affected much by the decline in the economy. Such type of defensive securities is beneficial in both glooming and booming cycles of the economy. A few examples of such defensive stocks would be utilities that are owned by the government, FMCG (Fast Moving Consumer Goods), etc. These are a few necessities that consumers buy irrespective of the economic conditions.
Both the bullish and bear markets have a large influence and impact on investments. It will be beneficial to take some time to determine in which direction the market is going in and based on that what investment decisions you should make. One should always remember one thing that the stock market has never failed to recover from a crash.
|||M. Hall, “Where Did the Bull and Bear Market Get Their Names?,” Investopedia, [Online]. Available: https://www.investopedia.com/ask/answers/bull-bear-market-names/. [Accessed 21 September 2021].|
|||“Bull vs Bear,” Corporate Finance Institute, [Online]. Available: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/bull-vs-bear/. [Accessed 21 September 2021].|