Even if you haven’t been into trading for long, you would definitely encounter the words “bull” and “bear” in various Brokers Review and Forex Broker Reviews. And you probably have a good idea of what these words mean in terms of the financial and investing world.
Bull and Bear Markets Explained
The words “bull” and “bear” not only describe the general condition of the market, they describe how investors feel about the market.
Simply put, if you are “bullish,” you feel optimistic about the market outlook. On the other hand, you’re “bearish” if you feel not too good or pessimistic about the market.
Now, when we say that we’re currently in a bull market, we mean that the market is currently on the rise. You can say that the market is on rise if you see a sustained increase in market prices. During these times, investors typically trust that the market uptrend will continue for a long time. This also indicates that a country’s economy is strong and employment levels are high.
To compare, the bear market is a market that spirals down. Usually, share prices continue to fall. This means a downward trend, which investors typically believe will continue. In this kind of market, the economy is typically weak, with companies laying off employees resulting to a drop in the employment rate.
The Origin of the Terms
Though nobody can pinpoint the real origin of the two words, there are two popular explanations why bull and bear are chosen to describe the market and investor sentiments.
One explanation claims that bulls and bears have different ways of attacking victims. Bulls drive up its horns into the air when attacking. This is probably associated with the upward movement of the market. On the other hand, bears swipe their paws down upon the prey. This resembles the downward trajectory that a falling market has.
Further, bulls and bears are historically fierce enemies during the times when it was still popular to let bulls and bears to fight in an arena.
Characteristics of the Market
Aside from the general direction of stock prices, a bull or a bear market can also signified by various characteristics.
First, the supply and demand for securities. In the bull market, you can see strong demand accompanied by a weak supply. Many investors are practically buying more securities while very few are selling them. This leads to the price of the stock rising and investors competing to obtain available equity.
Second, investor psychology. We all know that investors are constantly affected by their sentiments and emotions. This also affects the overall market. In the bull market, investors participate in the market to obtain profits. In a bear market, investors move their money away from the market and towards fixed-income securities. Overall, investors’ confidence affects the market.
Lastly, economic activity. The stock market and the economy are strongly linked. As mentioned, a weak economy brings about or goes with a bear market, while a bull market brings about or goes with a bull market.
It is important to know what kind of market you are currently trading in for you to assess the risk, the strategy, and the mindset you should have. There will always be changes, and this means that a bull market may last for a long time, but the bear market will always rear its head and return.