You must have often heard investors talking about a Bull or a Bear market and how they lost money or earned a profit during these times. If you are a beginner investor and looking to invest in the share market, the understanding of a Bull and a Bear market is important for success.
Bull Market
Bull MarketA bull market is when the buyers are optimistic about the rise in the prices of the shares. It is the time when the share prices are rising because the economy is doing well, the GDP is rising, and the unemployment level is low. It gives the investors’ confidence that the share prices will rise and they tend to buy more shares in the market. The investors who are optimistic and buy shares at this time are called “Bulls.”
Bear market
A bear market is when the buyers are pessimistic about the rise in the prices of the shares and the sellers outnumber the buyers in the market. A bear market is due to the economy not doing very well; the GDP levels are falling, unemployment is high, and there is a fair chance that recession is approaching. When the investors are pessimistic, they tend to sell their shares rather than buy new ones and thus, are called “Bears.”
What drives the Bull and Bear markets?
The Indian stock market is affected by many economic and social factors. Rising economy, high employment levels, increased GDP, stable economic and social factors help build the confidence of the investors to invest money in the share market. This is the main reason that gives rise to a Bull market.
Apart from these, new technologies and companies that encourage the investors to invest money in stocks can also create a bull market. For example, during the dot-com craze in the 1990s, many companies encouraged the investors to put money in the market, which in turn created a bull market.
On the other hand, deteriorating economy, decreasing employment levels, falling GDP and unstable social and economic factors reduces the confidence of the investors and force them to sell their shares to cut their losses. This lead to fall in prices of the shares and a bear market is established.
As the economy falls, the companies start to downsize. Increased level of unemployment makes investors far less willing to invest money in the market. This is a time that they need money, so they sell their shares and create a bear market.
How To Invest In A Bull Market And Bear Market?
Investing strategies differ significantly between bull and bear markets:
Bull Market Strategies:
1. Buy and Hold: Investors often buy and hold stocks, anticipating further price increases.
2. Increased Risk Tolerance: Investors may be more willing to invest in growth stocks or riskier assets.
3. Momentum Investing: Buying stocks that are trending upwards in anticipation of continued growth.
Bear Market Strategies:
1. Defensive Stocks: Investors often shift to stable, dividend-paying stocks in sectors like utilities or consumer staples.
2. Short Selling: Some traders profit from falling prices by short-selling stocks.
3. Dollar-Cost Averaging: Regularly investing fixed amounts can help average the purchase price over time.
How to predict a Bull and Bear market?
One of the easiest ways to predict Bull or a Bear market is to understand that ‘History repeats itself’ and ‘what goes up must come down.' That is, if in the current market, the share prices are rising, you know that they will fall in the future and a bear market will be established. And if the prices are falling in the current market, you can be confident that eventually, the share prices will rise again and a bull market will be established.
While you can’t precisely predict when a Bull or a Bear market will be established, certain things can affect a current market and drive it to change its course:
- A bullish market will be established if a country wages war, as it will produce more jobs and the investors will feel confident if they think they would win.
- A sudden international crisis will always create a bearish market as the economies are affected negatively.
- Negative news about a company having huge market capitalization affects the market negatively and creates a bearish market. Positive news, on the contrary, creates a bullish market.
To sum up
A bullish market is a time when the demand is higher than the supply of shares and results in the rising of the share prices. A bearish market is a time when the supply is higher than the demand for the shares and results in the fall of the prices of the shares.
It is wise that an investor buys more shares during a bearish market as the shares are available for cheap and sell his/her shares during a bullish market as more people are looking to buy during this time and you can sell your shares at a higher price and book a profit.
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