Bull-Bear market: meaning and differences. How to behave in each case?

What do bull market and bear market mean? The meaning and the differences between the two financial terminologies are fundamental for operating in the markets.

In the jargon of investors and market operators, the two expressions mean "rising" (bull) market and "decreasing" (bear) market, but what are their differences?

When it comes to market conditions it is easy to come across these definitions. As much as they are used, understanding their meaning and their differences is not as easy as it seems.

Given that the trends and directions taken by the market have repercussions on your portfolios, understanding what bull market and bear market mean and what their differences are is fundamental, especially if you are taking your first steps in the sector. What are the bull market and the bear market and what is the difference between them?

Bull market and bear market: origin of terms

Before delving into the meaning of bull market and bear market and discovering the differences between the bear market and the bull market, it is necessary to investigate the origin of these terms. Both were so called, at least according to the dominant theory, by virtue of the differences between the attack modes of the two animals.

The bull horns upward, so a rising market is called a bull market. Conversely, the bear’s paw is direct downward, which explains why bear market is a term used to indicate the falling market.

In the Elizabethan era, both in Rome and in London, the bull and the bear used to fight in the arenas to delight the population and most likely them being at the antipodes inspired today’s metaphor of the stock market.

The bull market-bear market difference, i.e. between the bear market and the bull market, begins to be clearer.

What is the bull market or bull market?

Generally speaking, we can say that the bull market and the bear market are market conditions determined by the price trend of equities. In reality there are specific characteristics, not certain and absolute rules, which can help us to highlight the difference between the two market conditions.

What is the bull market and what are the characteristics of the bull market?

• Supply and demand: in a bull market we are able to observe strong demand and weak supply. In other words, many want to buy, but few are willing to sell. The consequence? An increase in prices.

• Investor Psychology: In a bull market, everyone is interested in actively participating in the hope of making a profit. Investor confidence is quite high which has a positive impact on equity prices.

• Change in economic activity: given that listed companies represent the participants of the large economy, the latter and the stock market are closely related. In a good business environment, people have more money to spend and make more profits, which drives up the share price.

What is the bear market?

Now that we have seen the characteristics of the bull market it will be necessary to understand which are those of the bear market, also known as bearish. Spoiler: the characteristics are completely opposite to those of the bull market.

• Supply and demand: in a bear market the opposite situation occurs, ie less demand and more supply. That is, there are more people willing to sell than actually wanting to buy, which leads to lower prices.

• Investor Psychology: if optimism prevails during a bull market, the same thing cannot be said when we talk about the bear market or the bear market. In the latter case, market sentiment is negative and investors are starting to move away from equities towards safer, fixed income investments. It’s a vicious circle: the drop in the share price drives investors who keep money out of the market, which in turn causes the price to drop even further.

• Change in economic activity: faced with a weak economy, companies are unable to record good profits as consumers spend less. The decline of the same profits leads to lower valuations on the stock market and therefore to a drop in prices. In summary, there are 3 major differences between bull market and bear market.

How do I understand if the market trend has changed?

How can I tell if a bull market is becoming bear and vice versa? Predicting the next stages of the market is certainly not an easy task (unless your name is Warren Buffett). To understand if we are in a bull market or bear market phase, it is not enough to highlight the presence of the aforementioned characteristics and it is not enough even to observe how the market reacts to a certain event.

The key to determining whether we are in a bull market or bear market phase is analysis and long-term observation. Small movements in the indices represent only short-term trends or temporary market corrections. Generally, if multiple indices have scored a variation of 15-20 percentage points, then it means that the market is changing or has changed direction: from the bull market we have moved on to the bear market and/or vice versa.

Again the above rule is not written in stone which means that even a prolonged phase can only represent a period of stagnation in which the market is looking for direction. In this case the trend will be flat and we could not speak of a bull market or a bear market.

How to move on the bull market and the bear market

In a bull market phase, broadly speaking, the best thing for an investor would be to take advantage of rising prices by buying at the beginning of the trend and selling when they have peaked. Fundamental in this sense will be to determine the exact beginning and end of the uptrend.

In a bear market phase the chances of loss are much higher than in the bull market, as stock prices continue to lose ground and it is not always possible to identify the end of the bearish trend. Even when you decide to invest during a bear market in hopes of seeing a new price rise, you will likely suffer more or less significant losses before that happens.

During a bear market phase, another choice for the investor may also be to invest in the so-called defensive stocks, ie those that are only minimally affected by a bearish or bullish market phase.

Conclusions

There is no 100% effective method that allows you to predict trends and market trends, which is why investors should consider the difference between phases and multiple elements before investing in both. Just like in a bear market phase, also in a bull market one must keep in mind above all the quality of investments and one must look at the market trends from a historical perspective.

Original article published on Money.it Italy 2022-03-04 15:51:00.
Original title: Bull-Bear market: significato e differenze. Come comportarsi in ciascun caso?