Market Basics: Bull vs. Bear Markets

Bull vs. Bear Markets

As a student, chances are you have already heard of bull and bear markets. But you probably never stopped to research its exact meaning. If you never bothered to take the time to research the exact definition, or you generally want to gain more information about market terminology in the financial world, we believe this article will benefit you greatly.

Enjoy reading!

Introduction to the terms:

As will be elaborated on later, the terms refer to two directions price changes take for any tradable good. More specifically, a BULL MARKET is associated with a rise / upward trend in price development, while a BEAR MARKET entails a plunge / drop in prices of the good. This often leads to market becoming dominated by pessimism towards the good’s future success, as traders are quick to assume a negative development must have caused this drop in prices.

Origin

The origin of the two terms stems from the manner at which bulls & bears attack their predators. The bull attacks its enemies by performing an upward, thrusting motion with its horns, while the bear will utilise its pawns by performing a downward motion, striking its enemies. We recommend to keep these animal characteristics in mind, as it will eliminate any possible confusion between the two terms when reading about them in the future!

What are the characteristics of a bull or bear market?

When referring to, or using the term ‘bull market’, the speaker means that the market is characterised by a general sense of optimism. Prices of bonds, commodities and shares have risen, as the demand for securities is high. Investors are likely to keep investing in these securities, as they trust that the rise in demand must have been sparked by a positive development related to the security.

During a bull market, many investors will be aiming to purchase many securities and demand will be high. Hence, although predicting the future price developments is very difficult and ultimately nobody knows which direction the prices will take, losses tend to be temporary and minimal during a bull-market.

On the other hand, we have the bear market. Despite large drops in prices, bear markets can be as attractive, if not more attractive, as a bull market if the right trades are executed and the direction of the movement is recognised timely. A common misconception in trading is that bear markets are fundamentally bad for investors! The typical reaction to a bear market is to short / sell the securities. In addition, investors will be pessimistic and reluctant to buy, as they will believe a negative development related to the share must have caused the drop in prices. As no one purchases the shares, prices will drop until investors consider them worth their money again and start to buy once more.

Quantitatively speaking

Adopting a quantitative approach, analysts talk about a bull market if the prices of the securities have risen by at least 20%, after having previously experienced a plunge of less than 20%, and have not experienced a new drop of the same amplitude in the meantime.

The macroeconomics of bull and bear markets

If many securities find themselves in a bull market, it usually signals the beginning of an economic expansion or contraction respectively. Employment, GDP and the number of initial public offerings (IPOs) will rise. The economy is strong and consumption & investment levels are high. On the other hand, bear markets are characterised by economic contraction, lay-offs and falling levels of investments & GDP.