Bull vs Bear market – How it impacts the stock price

What is the bear market?

What is the bull market?

When a bull or bear market starts?

Are you searching answers to these types of questions? If Yes, don’t worry, you are at the right place. This article will define what is the bull and bear market. You will also understand the differences between these two.

Market participants buy stocks to make money. It’s an expectation that if they buy a particular stock, they will create wealth. 

Expectation of these market participants is based on certain factors. One of such factors is economic events. If people feel that times are getting bad and the economic data is supporting it, then the majority of them will not buy stocks, they prefer to sell stocks that they currently own with an expectation to buy when the economy recovers. 

They don’t buy stocks because they feel that stock valuation will be down compared to the present market price, which ultimately won’t give them a good return.

Remember, the reverse is also true when the economy does well.

The first rule of investing in the stock market is to avoid or minimize losses and maximize profit.

What is a bull market?

Stock prices go up or down based on people’s buying or selling behaviour. 

If more people are buying stocks compared to the number of people selling, then stock price rises as demand goes up and supply comes down. 

The reverse is also true. 

If more people are selling stocks compared to the number of people willing to buy, then stock price falls as demand comes down and supply to the market goes up.

Bull markets start when the economy roars forward and people become more optimistic about the company’s earnings growth.

In simple words, the bull market is the condition of the stock market when stock prices continue to rise.

The term “bull” or “bullish” comes from the bull, who strikes upward with his horns, thus pushing prices higher.

Bull market tend to precede in following situations;

  • Economic rebound
  • Economic recovery
  • Economic growth
  • Growth in top-line revenue and bottom-line of industry leaders

What is a bear market?

When the stock market falls over a period of time by losing 20% to 30% in value or more, market experts call this a bear market.

Market participants observe stock market decline by looking at the percentage of decline in indexes such as SENSEX, NIFTY, DOW, S&P 500 or the NASDAQ composite. 

A bear market will drop the price of your stock as demand goes down and supply is up.

A bear market creates a great opportunity for value investors to pick fundamentally strong stocks with the intent to hold for a long term. Some value investors see the bear market as a clearance sale to pick their favourite stocks.

When you are bullish, it means you believe that the stock price will rise. To be bearish means the stock price will fall. Being bearish is the exact opposite of being bullish.

When a maximum number of investors lose confidence in the stock market, the bear market begins. 

The term “bear” or “bearish” comes from the bear, who strikes downward with its paws, thus pushing prices down.

Bear market tend to precede in following situations;

  • Recession
  • Depression
  • Economic contraction
  • Rising unemployment
  • Shrinking corporate profits
  • Decrease in consumer spending
  • Financial crisis
  • Government intervention increases in businesses
  • National and/or international conflict arises
  • Any threat on economy

Here are the indicators to know bear market ends;

  • Economic conditions of consumers and companies are stable and strong
  • Economic indicators are showing positive signs
  • Peace and stability prevailed
  • Demographic appear favourable

The term bull and bear market is used to describe the market trend of securities.

After a bear market, the bull market will begin when the maximum number of investors will have confidence in the stock market. 

Tips to tackle bull and bear market

Remember, there is no magical bell that will ring when the bear market ends or bull market starts. 

Everyone can identify bull and bear markets when they become a mature trend. But those who can foresee it coming and have the guts to invest based on their expectation, are the one who succeed in making money.

Experts call it a contrarian approach. A contrarian is an investor who goes against the crowd based on his research and knowledge. It does not mean that you will start buying when others are selling. 

Contrarian investors don’t believe in crowds, instead they go by their own research. Based on their knowledge, research and information available, they buy when people are selling and sell when people are buying. 

Experts say that the bull market starts at the depths of a bear market. When people avoid stocks, market price comes down to a level when value investors think that it’s time to pick up some solid companies at a great price. 

When everything in the stock market goes up, everybody seems to be picking stocks without knowing whether it’s good or bad for investment.

Remember, you have to also understand when bull markets mature. A matured bull market creates problems as it is a sign of a great correction in stock prices.

Here are few important tips to help you investing better in any market conditions;

  • Acquire stock at a price that is near or below the book value of the company they represent.
  • Make sure that the company has positive growth in sales and earnings.
  • Invest in companies with strong fundamentals.
  • Choose stocks of companies in a growing industry.
  • Diversify your portfolio.
  • Make sure you have money to take care of your 5-6 months living expenses in an emergency fund.
  • Keep your debt at a comfortably low level.
  • Buy undervalued stocks with strong fundamentals
  • Have few defensive stocks in your portfolio. In economic downturns, these stocks generally perform well as they sell goods and services that people are bound to consume no matter how good or bad the economy is doing. Few examples are companies in the food and beverage, utilities and healthcare sectors.
  • Your allocation to stocks should be based on your financial situation, age, debt and financial goal.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.