Bull vs. Bear Market: Definitions & Differences
Bull and Bear markets are the common terms for traders and investors. Yet, what are they, exactly? And what are the primary differences between bull and bear markets? This article deciphers the main points in the definitions, characteristics, and how to diffentiate the bull markets from the bear ones.
An Overview of a Bull Market
A bull market indicates the rising prices or the potential rise of prices in the financial market. People usually use this term to describe the stock market, yet you can still find it in the content of bonds, real estate, currencies, and commodities.
Instead of pinpointing the certain moment in which the rise of stock prices, the “bull market” describes the extended periods when most security prices rise. It usually lasts from months to years.
Bull markets happen as a positive signal of corporate profits and a strong GDP (Gross Domestic Product). So, investors have more confidence in the growth of their trading earnings. The increase in the amount of IPO activity is an obvious outcome!
An Overview of a Bear Market
Highs and downs are what the financial markets are all about, which forms the market volatility. While highs are what a bull market describes, downs are what a bear market indicates. It points out the drop of at least 20% in security prices from recent highs. So, the widespread pessimism and negative atmosphere will fill up the investor sentiment.
People usually attach this term to the decline in an overall market, the S&P500, or commodities. A bear market usually lasts two months or can last longer. Bear markets can pair up or be the result of economic downturns like a recession.
How to Describe Bear and Bull Markets
Through simple definitions above, the highlight and main difference between bear and bull markets are the directions of stock prices. Bear markets go along with decreasing prices while bull markets accompany the increasing prices.
There are other characteristics that you should not overlook to get the best out of these markets.
Supply and Demand for Securities
A bull market brings positivity due to the rise in prices so many investors join the market at such moments. Specifically, they will buy securities before the prices get higher. It means the demand for securities gets heated while the supply is reserved. So, the share prices will keep on the growth as investors compete against each other to obtain available equity.
On the other hand, a bear market drags along the pessimism due to decreasing prices. So, investors tend to sell their stocks before the prices dip lower. So, the supply of stocks gets higher than the demand, which makes the prices keep dropping.
The supply and demand law shows its impacts in the way price moves in the bearish and bullish markets.
Investor Psychology
The reactions of investors profoundly affect the direction of prices. So, studying investor psychology and sentiment plays an important role in price action forecasting and making up great and timely decisions.
The eagerness in buying and selling ranges in bear and bull markets. Investors tend to take risks when the market shows signals of stock price rises in bull markets. Meanwhile, they become more cautious if bear markets take place!
Change in Economic Activity
The link between the economy and stock prices is undeniable. When the economy gets on its downside, the bear markets are likely to happen. The prosperity of the world economy leads to the bull markets. So, we can see the strong link between the economy status and the direction of prices.
The Differences Between Bull and Bear Markets
The following content summarizes the key points that you can use to differentiate bull markets from bear markets.
- Bull markets indicate the rise of stock prices, which can last for months or even years. Meanwhile, bear markets show the downfall of stock prices.
- The link between market status and the economy is strong. When investors are eager to invest in the bull markets, it drives the economy forward. When investors get pessimistic about the future of stock prices, the bear markets lead to the saturation or decline of the economy.
- Investor psychology is the reflection of what happens and will happen in the financial markets. So, learning how traders and investors react to the price movements can help you have a trading edge.
- The supply and demand law shows its role in explaining when prices drop in the bear markets and increase in the bull markets.
The next article will share effective strategies that you use to take advantage of the bull markets and handle risks in the bear markets.
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