What are Bull and Bear Markets?

Almost everyday in the investing world, you will hear the terms "Bull" and "Bear" to describe market conditions. Because the direction of the market is a major force affecting your portfolio, it's important you know what the terms Bull and Bear market actually signify, how they are characterised and how each affects you.

What are Bear and Bull Markets? Used to describe how Stock Markets are performing in general - that is, whether they are appreciating or depreciating in value - these two terms are constantly buzzing around the investing world. At the same time, since the market is determined by investors' attitudes, these terms also denote how investors feel about the market and the ensuing trend.

Simply put, a Bull Market refers to a market that is on the rise over a long period of time. It is typified by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long-term. Typically, the country's economy is strong and employment levels are high.

On the other hand, a bear market is one that is in decline. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue in the long run, which, in turn, perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.

Characteristics of a Bull and Bear Market although we know that a Bull or Bear Market condition is marked by the direction of stock prices, there are some accompanying characteristics of the Bull and Bear Markets that investors should be aware of.

The following list describes some of the factors that generally are affected by the current market type, but do keep in mind that these are not steadfast or absolute rules for typifying either Bull or Bear Markets.

Supply and demand for securities

In a Bull Market, we see strong demand and weak supply for securities. In other words, many investors will be willing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available equity. In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply, and, as a result, share prices drop.

Investor psychology

Since the market's behaviour is impacted and determined by how individuals perceive that behaviour, investor psychology and sentiment are fundamental to whether the market will rise or fall. Stock Market performance and investor psychology are mutually dependent. In a Bull Market, everyone is interested in the market, willingly participating in the hope of obtaining a profit. In a bear market, the market sentiment is negative as investors are beginning to move their money out of equities and waiting in fixed-income securities until there is a positive move. The decline in stock market prices shakes investor confidence causing investors to keep their money out of the market - which, in turn, causes the decline in the stock market.

Since the businesses whose stocks are trading on the exchanges are the participants of the greater economy, the stock market and the economy are strongly connected. A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market values stocks. In a Bull Market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.

How to gauge market changes

The key determinant of whether the market is Bull or Bear is the long-term trend, not just the market's knee-jerk reaction to a particular event. Small movements would only represent a short-term trend or a market correction. Of course, the length of the time period that you are viewing will determine whether or not you see a Bull or Bear Market.

For instance, the last two weeks could have shown the market to be bullish while the last two years may have displayed a bearish tendency. Thus, most agree that a decided reversal in the market should be ascertained by the degree of the change: if multiple indices have changed by at least 15-20%, investors can be quite certain the market has taken a different direction. If the new trend does continue it is because investors perceive changes in both market and economic conditions and are thus making decisions accordingly.

Not all long-term movements in the market can be characterized as Bull or Bear. Sometimes a market may go through a period of stagnation as it tries to find direction. In this case, a series of up and downward movements would actually cancel-out gains and losses resulting in a flat market trend.

Conclusion There is no sure way to predict market trends, so investors should invest their money based on the quality of the investments. At the same time, however, you should have an understanding of long-term market trends from a historical perspective.

Because both Bear and Bull Markets will have a major influence over your investments, do take the time to determine what the market is doing when you are making an investment decision. Remember though, in the long-term, the market has posted a positive return.

Source: Investopedia.com