• HDFC securities
• 27 Mar 2023
• Knowledge Centre

 

 

A bull market and a bear market are two widely used terms in Stock market parlance. These two phrases are used to describe the sentiment and direction of the market. It is essential to understand the bull market and bear market conditions to take informed investing decisions. Let us explore the difference between bull and bear market.

About Bull and Bear markets

A bull market is a condition where prices of securities are rising constantly and are likely to continue rising. During a bull market, there is widespread optimism among investors and the sentiment is upbeat. The nomenclature of the bull market draws inspiration from the animal Bull. The bull attacks its prey by thrusting its horns up into the air. Similarly, the stock prices are almost touching the sky in the bull market, allowing you to reap incredible returns. The bull market phase typically lasts for a brief period of time.

A bear market is a market condition where stock prices are rapidly declining. The downward market trend is likely to continue for some time. This indicates there is a lot of uncertainty in the market and investor sentiment is pessimistic. The word bear market draws inspiration from the animal bear as it swipes its paw downward to attack its prey.

Difference between Bull and Bear market

Following are quick differentiating pointers of the Bull and Bear market:

• Stock prices

Stock prices are undoubtedly the primary indicator of the market trend. It is generally considered that a bull market is a period when the stock prices rise 20% from their recent lows. On the contrary, a bear market is when the stock prices drop 20% from their recent highs.

• Demand and supply of stocks

In the bull market, as stock prices rise rapidly, many investors may wish to get into the game. Given this the demand for stocks increases. Moreover, knowing the potential to earn good returns, most existing investors do not wish to sell their stocks.

It’s the opposite in the bear market. Since the stock prices are declining not many investors wish to buy stocks, and the existing investors sell their stocks the earliest possible. This indicates there is a high supply but minimal or absolutely no demand to meet.

• Investor sentiment

During a bull market phase, since the stock prices are rapidly increasing, investor sentiment is positive. New investors wish to enter the market, while existing investors may wish to redeem their investments and earn good profits or continue to hold their investments.

In the bear market phase, as the stock prices are declining and there is no certainty of when will the market bounce back, negative investor sentiment engulfs the market. There is widespread pessimism and new investors refrain from investing in the share market while existing investors wish to square off their positions.

• Economic condition

The stock market and the country’s economy are linked to each other. The bull market indicates the companies listed on the stock market are doing well, witnessing high profitability and the demand in the economy is strong. This improves and strengthens the economy.

The bear market indicates a weak economic condition. It signifies that companies are unable to generate huge profits amid weak consumer spending. This drop in profitability directly impacts the share prices and ultimately overall market.

Investing in each type of market

Now that you are fully aware of the difference between bull market and bear market, you must learn to invest in accordance with it. Be realistic in the bull market, while being patient in the bear market. It is important to remember that both bull and bear markets provide opportunities for investors to make profits, but also come with their own risks. Ultimately, successful investing requires a sound strategy and careful consideration of market conditions.