Introduction
Stock markets across the globe are in a crazy run. In any situation, the stock markets are either showing the up-trend or they are at the down-trend. Understanding this cyclical nature of the financial market is essential for all the investors and other market participants. “Bull Market” and “Bear Market” are the two fundamental concepts in stock market operations.
The terms ‘bull’ and ‘bear’ represent the nature of stock prices based on the attacking patterns of the respective animal representation. Bull horns upwards, reflecting the rising prices and bear paws downward, representing the falling prices.
Defining Bull Market
A bull market represents the positive sentiment of the stock market. It is simply a stock market situation where asset prices are rising generally due to investors confidence in the market and strong economic conditions. Positive intent of the investors lead to upward trend in stock prices, bonds and other financial assets and derivatives.
For instance, a market is a bull market when it increases by 20% or more in the market index from its recent low. This is not the ideal condition. There are other certain parameters which act as an indicator of a bull market situation. Some of such indicators are:
Rising Prices
In a bull market, the price of securities like stocks, bonds, and commodities increases steadily. Increasing prices indicates the positive sentiment and confidence of the investors in the market. Such increase in prices also indicates the increasing demand of securities i.e. high involvement in the stock market.
High Confident Investors
Rising prices of securities reflects positive sentiment of the market and is an indicator of a healthy economy. Positive economic parameters, strong corporate earnings, progressive securities prices boost the confidence of investors. Positive market conditions and confident investors are in support of each other.
Economic Growth
A bull market is a synonym for economic growth. Generally, we see a bull market when the economy is strong and progressive. GDP growth, investment growth, growth in consumer spending, low employment rate, favorable government policies etc. reflects the economic growth. All these positive indicators promote a favorable stock investment environment leading a bullish trend.
Corporate Earnings
When a company is doing good in terms of profit and performance, it signals a positive message among the investors and other stakeholders of the capital market. Corporate earnings directly impact the stock valuation, earnings per share and other fundamentals of the business. The positive trend in these financials lead to positive sentiment of investors. This creates a ripple effect in the market leading to investors getting more involved in the capital market making the market bullish.
Example of a Bull Market
There are multiple time periods when the global market was in a bullish trend. One of such prominent times was the ‘Dot-com Bubble’. This period lasted for five years i.e. from 1995 to 2000 when the world market saw a massive shift in technology and a drift in stock of such tech-based companies. Companies like Amazon, eBay and Yahoo were thriving in the stock market and their stock prices skyrocketed during this period. Eventually this bubble burst and marked itself as one of the golden periods and a strong bullish event.
Defining a Bear Market
A bear market is just the opposite market condition to a bull market. It is simply a stock market situation where asset prices are decreasing generally due to low investors confidence in the market and pessimistic economic conditions. A bear market reflects a prolonged drop in the investment prices.
A bear market is defined when securities prices fall 20% or low from its market index from its recent high. This is a general statement to define a bear market but there are other parameters that act as indicators for a bear market. Some of such indicators are discussed as follows.
Falling Prices
In a bear market, the price of securities like stocks, bonds, and commodities decreases steadily. Decreasing prices indicates the negative sentiment and confidence of the investors in the market. Such decrease in prices also indicates the decreasing demand of securities, low confidence of the investors and hence the low return in investment leading to less involvement in the stock market.
Low Confident Investors
In bear markets, the confidence of the investors is low and investors are pessimistic regarding the market. Investors consider other investment horizons to stock investment leading to decrease in buying activity and increase in selling activity.
Economic Slowdown
Economic slowdown is a situation of declining GDP, rising unemployment, decreasing consumer spending and lower investment. During such a slowdown, businesses experience difficulties and the mindset of investors is to avoid investment in such a depressing business environment. Market sentiment is to survive rather than to thrive.
Example of Bear Market
Most of the financial crisis represents the bearish situation. One of such prominent bear market situations is ‘The Global Financial Crisis’ of 2007-2009. During the subprime mortgage crisis, major financial institutions collapsed. This led to widespread economic recession, high unemployment, and significant losses in the financial markets.