In the world of finance, the terms “Bull vs. Bear Market” are frequently used to describe the state of the economy or stock market trends. But what exactly do these terms mean, and how do they impact investors? A bull market is characterized by rising stock prices and generally positive investor sentiment, indicating a thriving economy. In this article, you will learn about bull market, bear market types, Difference between Bull phase and Bear phase, etc.
This article will provide key insights for GS Paper-III Economy of UPSC IAS Exam.
Table of Content
- What is a bull market?
- What is a bear market?
- Bull vs. Bear Market
- Behaviour of investors
- Conclusion
- Frequently Asked Questions
What is a bull market?
- A bull market refers to a period in a financial market where prices of asset experiences significant and sustained growth over an extended duration.
- Though no formal criteria exist for defining a bull market, it is generally a time when investment prices surge by at least 20% after two preceding distinct periods of 20% declines.
- Various factors contribute to the rise of bull markets.
- They coincide with an upswing in other crucial macroeconomic indicators, such as corporate earnings, gross domestic product, and consumer spending.
- Also, investor confidence plays a pivotal role in driving bull markets such as positive sentiments can make investors inject more capital, which may propel prices even higher.
- People have more money to spend, which further strengthens the economy.
- Bull markets often witness increased trading volumes and provide more opportunities for sellers due to increased demand.
- The duration of a bull market can span from several months to several years.
- A bear market refers to a period in a financial market where asset prices in a financial market significantly decline over an extended duration.
- Though no formal criteria exist for defining a bear market, it is generally a time when investment prices drop by at least 20% after a recent peak.
- Bearish markets are triggered by major shifts in macroeconomic factors and geopolitical events.
- They coincide with a downstream in other crucial macroeconomic indicators, such as corporate earnings, gross domestic product, and consumer spending.
- Also, investor confidence plays a pivotal role in driving bear markets such as negative sentiments can make investors draw out more capital, which may propel prices even lower.
- Most businesses don’t gain much profits or may even suffer loss as consumers are not spending enough.
- This decline in profits further affects the way the market values stocks.
- They tend to follow bull markets, which are periods of high asset prices as compared to historical levels.
- A bear market is associated with a weak economy.
Bull vs. Bear Market
| Factors | Bull Phase | Bear Phase |
| Economy prices | Stocks, though riskier, offer higher returns during this time. Equity investments yield good returns.Equity experience robust demand and limited supply.Prices of equity increases as investors compete to acquire available stocks. | During a bear phase, capital preservation and stable income become vital. Investors seek less risky options like bank fixed deposits, gold, and government bonds.The demand of equity is lower than the supply. |
| Gross domestic production (GDP) | High GDP growth is expected, leading to increased economic demand, higher industrial output, sales, and turnover. | GDP expectations are low, leading to decreased demand, lower production of goods, and reduced sales volumes. |
| Inflation | Inflation rises due to increased demand, which encourages wholesalers. Wages and supplier prices also increases. | Demand shrinks or remains steady, leading to an increase in essential goods’ prices like food, clothing, among others. These impacts retail. |
| Interest rate | The interest rate cycle is on an uptrend, attracting foreign investors to a high–interest rate environment, controlling excess liquidity in the economy. | The RBI reduces interest rates to stimulate liquidity and boost production. Foreign investors may avoid investing or pull out. |
| Consumer sentiment | All aspects of the economy performs well, and consumer spending increases. | In a bear phase, consumer spending reduces as the economy slows down. Individuals aim to save more until economic growth revives. |
| Employment | It leads to a thriving industry, increased production, and greater employment opportunities across the country. | Under this, industrial and production segments of an economy are affected, resulting in lay-offs to cut costs and higher unemployment levels. |
Behaviour of investors:
Bull market:
- In a bull market, investors can capitalize on rising stock prices by purchasing stocks early in the trend and selling them at their peak.
- During this period, any losses are minor and short-lived, allowing investors to confidently invest in more equity with a higher chance of returns.
Bear market:
- In contrast, a bear market presents a higher risk of losses as prices declines continuously.
- Thus, investor relies on short selling or safer investments like fixed-income securities.
- Investors may also turn to defensive stocks, which are minimally affected by market trends.
- These stable stocks perform well regardless of economic conditions, belonging to industries that are government-owned or providing necessities that people buy regardless of the economy.
- Other strategies include buying inverse Exchange-Traded Funds (ETFs), or acquiring putoptions.
- A put or put option is a derivative instrument in financial markets that gives the holder the right to sell an asset at a specified price on a specified date to the seller of the put.
Conclusion
In the financial landscape, the terms “bull” and “bear” market denote significant market trends that influence investor behavior and economic confidence. A bull market is characterized by rising stock prices, typically by 20% or more from recent lows, reflecting economic strength, investor confidence, and expectations of strong future earnings. Conversely, a bear market is marked by a decline in stock prices by at least 20%, often triggered by economic downturns, widespread pessimism, and expected declines in earnings. Bull markets offer opportunities for profits in a rising market, while bear markets, though challenging, can provide opportunities for buying undervalued securities
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FAQs Frequently Asked Questions
Which is better bull or bear market?
Bull markets tend to last longer than bear markets, in part because stock prices tend to trend upward over time.
What is a bull vs bear vs pig market?
Bulls and bears have opposite investing styles, but each type of investor can make money over the long-term by investing according to their stated investment goals and strategy. Pigs, by contrast, eschew the buy-and-hold strategy and approach investing inconsistently.
Can stocks go to zero?
If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders.