Bull Market vs. Bear Market – Know the Difference

The stock market of any country in the world is like a heartbeat, fluctuating throughout, depending on many different circumstances. The market will go up or down, what in financial terms is called a “bull market” when the overall market scenario is optimistic and the stock market is rising. On the other hand, if the market goes down, it is called a “bear market”. The terms apply to how each of these animals attacks their opponents. The bull will raise its horns into the air in the respective situations, while a bear will crush its paws on its prey.

A bull market occurs when the economy is very resilient, the GDP of the economy is growing and job creation is also increasing. Stock picking is more comfortable in such a setting because overall health is stable. If an investor is optimistic, they are said to have a “bullish outlook”. 

Bear markets are the opposite, the economy is in recession for a long time and stock prices fall rapidly. As a result, stock selection becomes very difficult and investors focus on making money by selling stocks (short selling). . Although someone with a pessimistic view is called a “bearish outlook”, many are predicting the situation to be temporary and a sign of an imminent revival.

What is a Bull Market?

This situation is defined as a market where securities prices are continuously increasing due to favorable macroeconomic scenarios or improved internal situation of the company or industry. Generally, the term applies to stocks, but it is also referred to other asset classes such as Bonds, FOREX and Commodities etc. Because the laws of supply and demand affect the market, prices in financial markets will increase when the supply of reserves decreases and vice versa.

Specific essential events are The bull market is preceded by investor confidence, positive expectations and general optimism in the market. Initially, most market changes are sentimental and not necessarily accompanied by solid economic news or corporate earnings. There will be a large amount of demand for call options in the derivatives market due to overall optimism.

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It should be noted that “bull markets” typically have four stages that indicate their life cycle:

• In the first phase, we go back to the pessimistic approach left behind by the downtrend market scenario. Prices are low and investor sentiment is quite weak. 
• The second phase triggers a recovery in stock prices, corporate earnings and business activity driven by economic indicators. above average performance. 
• In the third stage, the stock market indexes and stocks are hitting new trading highs. Stock trading continues to rise and dividend yield is falling to a low level, indicating sufficient liquidity in the market. 
• In the final stage, IPO activity increased, along with trading and speculation. Stock price/earnings ratio is at an all-time high.

While bull markets offer many money making opportunities and many investments available, such situations do not last forever. The exact timing of its entry and exit cannot be predicted. Investors need to know when to buy and sell to maximize their profits and try to correct the market.

What is meant by Bear Market?

Such a situation describes a downtrend of the market for a while. The market has a pessimistic approach and asset prices may fall or fall in the short term. This will cost investors a lot of money as stock prices fall across the board, and investor confidence is also expected to suffer. The characteristics and causes of bear markets vary depending on the circumstances. However, economic cycles and investor sentiment play a central role in its projected direction and projected duration. Some indicators of a weakening economy are:

• Few job opportunities 
• Less disposable income in the hands of the public 
• Decreasing business profits 
• The existence of several new trading lows and lows 
• Sell ​​short or increase the use of put options 
• Unprecedented changes in government tax rates or different tax rates

Bear markets typically have four stages:

• In the early stage, investor sentiment and security are very high, but investors extract maximum profits and exit the market. 
• In the second stage, stock prices fall rapidly, business activity and corporate profits decline, and economic conditions improve. indicators are not working as expected. Investor confidence is heading towards pessimism and can create panic. Stock indexes and many stocks are hitting lows in new trading and dividend yields are also at very high levels. This indicates that more money needs to be injected into the system. 
• The third stage emphasizes the entry of speculators on the market with prices and trading volumes continuing to increase. 
• The final stage shows a continued decline in stock prices, but at a slower rate. It is considered a low point of reflux. Investors are starting to believe that the worst may be over and a positive reaction is starting to pour into the bear market, eventually allowing the bullish outlook to reemerge.

Key difference between bull market and bear market

• The market is considered bullish when the overall market scenario is positive and the market movement is bullish. A bear market is when market performance declines.
• In a bull market, an investor’s outlook is very optimistic, and this is seen from the fact that investors will enter a long position. on the market. In this way, the stock price is expected to increase further and the investor has the opportunity to maximize the opportunity to profit. Conversely, in a bear market, market sentiment is quite pessimistic and leads investors to buy into short positions.
• Sustainable economic growth in a bull market. Conversely, in a bear market, the economy will shrink or not grow at a faster rate, as in the bull scenario. In these two situations, an indicator like GDP (Gross Domestic Product) plays an important role in giving an overview of the economy’s performance in terms of existing factors.

• In a bull market, market indicators are strong. These indicators are used in technical analysis to predict market trends and various ratios and formulas that explain the current gains and losses of stocks and indices and their expected movements in the future.
• The labor market in a bullish state is very bright and there is more disposable income in the hands of the public. However, in a bear market, the labor market is tight and efforts are made to control spending quickly if the situation does not improve.
• In a bull market, there is ample liquidity circulating in the market and investors keep pumping more money in with increased trading activity and investing in stocks, gold, real estate, etc. However, liquidity dries up in the system during a bear market. , and investors don’t want to commit. Investments made in a bullish scenario are either sold, preventing further decline, or kept for future use. This can lead to dark hoarding and marketing situations.
• IPO activity is encouraged during a bull market because market sentiment is positive and investors are willing to invest more money. However, in a bear market, an IPO would be avoided because investment would be discouraged and people would want to hold existing positions and cash.
• International investment is automatically encouraged during a bull market to expand an existing portfolio.
• Bull market will prompt the banking sector to cut rates on business growth-boosting loans, spur expansionist policies of the central bank and the government. In contrast, in a bear market, the banking sector will restrict the use of cash for emergency situations due to restrictive policies of the upper body. Lending interest rates will be kept stable or increased.
• During a bull market, stock and dividend yields will be low, highlighting an investor’s financial strength and the safety others can enjoy on the investment made, while then, in a bear market, this yield will be very high, indicating demand for and trying to attract investors by offering a higher yield on the security at a later date.

Whether the market experiences a bull or bear market scenario is not in the hands of any single or single factor, but rather large scale factors and other macroeconomic circumstances. Every investor has to go through such stages as these situations are inseparable. Statistically speaking, the market is bullish as we observe a 20% increase in stock market performance. 

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Conversely, if the stock market drops 20% or more, a bear market condition is marked. Investors will orient their investments based on various factors that determine the outlook the market is experiencing. Investor entry and exit are affected and investor sentiment plays an important role in determining the timing of bullish or bearish prospects. It is impossible to escape from either scenario, and therefore judgment is required before investing, and patients must also be required in volatile market conditions.

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