Bull vs Bear Market - What Investors Need to Know

Stock Markets throughout the world are volatile depending on the circumstances of the country. A market going up is generally referred to as a bulls market and a market moving downward is referred to as a bear market. The terminologies apply to how each of these animals attacks their opponents. The bull will thrust its horns in the air in respective scenarios, whereas a bear will stamp its paws down on its prey. To get access to the stock market an investor needs a broker or a trading app

A bullish market is usually due to a smooth economic situation, a rising GDP, and great job opportunities. A stock market is considered healthy during such a situation.

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On the contrary, a bear market is an opposite. In such a case, the economy is in a recession and stock prices are dropping low consistently and rapidly.

Let’s dig deeper and everything an investor needs to know about the Bull and Bear market.

What is a Bull Market?

A Bull market is when the stock market is escalating due to increasing prices of listed securities. Usually, the stock market index rises by at least 20 % during a bull market. With a bull market, stock prices steadily increase, and investors are optimistic and encouraged about the stock market’s future performance. Solar energy stocks are also one of the best investment options.

Some basic facts about a bulls market:

Bull markets are headed by optimistic investors which are confident about the market and have positive expectations from it
Some of the market movements during the initial phase of a bull market are usually psychological and there are no sound facts, like economic improvement and/or great earnings, to support it
The demand for call options rises in the derivatives market

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A Bull Market is categorized into four phases/ stages:

The first stage is the revival of the pessimistic approach. Right now, investor sentiment is weak and prices are comparatively low
The second phase is marked by the revival of stock prices and high trading activity supported by above-average economic performance
In the third phase, market indices and securities reach new heights. The stock prices continue to rise during this stage.
In the fourth stage, IPO activities are at their peak; trading and market speculation is also at their peak level of activity and the stock PE ratios are at their all-time high. Check out: List of Most Volatile Stocks

How Long Does a Bull Market Last?

Bulls markets offer multiple profit earnings opportunities but these situations do not last forever. The precise timing of the start and end of a bulls market cannot be predicted. Investors must know when to buy and sell to maximize their gains and attempt to time the market. Renewable energy stocks have been very popular in the year 2020 and their popularity continues to increase in 2022.

However, Bull markets can last for a few months to several years, but they tend to be longer than bear markets. What’s fascinating to know is that bull markets are more frequent than a bear markets: Bull markets have occurred for 78% of the past 91 years.

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Bear Market

Bear markets depict a downward trend in the stock market. The prices of assets and securities are n their downward journey. If not, they will soon start to fall in the immediate future. Bear markets usually erode not only investor profit but also their invested capital This in turn results in investor confidence hitting rock bottom.

A bear market is often caused by a slowing economy and rising unemployment rates. Investors’ sentiment is generally pessimistic about the whole stock market. Changes in the stock market may be accompanied by a recession. But a bear market doesn’t always indicate that a recession is coming.

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What causes a bear market cannot be shortlisted to a couple of causes. All the factors that can lead the stock market towards a bearish trend are:

Fewer job opportunities
Low disposable income of the general public
Declining corporate profits
Existence of several new trading lows and troughs
Short selling or increasing the use of Put options
Unprecedented changes in tax rates

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A Bear Market can be categorized into four phases/ stages:

In the first phase, investor sentiment is stable and the securities are trading at high prices. But investors are exiting the market
The second phase is marked by rapid drops in stock prices, lower trading activity, and declining corporate profits. Also, the economic indicators fail to meet expectations. As a result, investor confidence drops and shifts towards a pessimistic approach to the market. Here, the panic in the market starts to arise as the market index along with securities reach new trading lows. Also, learn about top shipping stocks in 2023.
The third phase highlights the entry of speculators. Now trading volume and stock prices start to recover a bit.
The last phase is marked by a further decline in the prices of securities but this time the drop is at a slower pace. Now the investors seem to believe that the worst is over and the stock market is all ready to recover. Now the positivity seems to be recovering eventually preparing the market for a bullish trend.

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How Long Does a Bear Market Last?

Historically speaking, bear markets have a shorter life than bull markets. The average length of a bear market is just 289 days or just under 10 months.

The Major Differences between a Bulls Market and a Bears Market

	Bulls Market	Bear Market
1	Economic Situation: High GDP Growth with high industrial output	Economic Situation: Low GDP with low industrial output
2	Prices of Securities rise	Price of Securities fall
3	Interest rates are high	Interest rates are being constantly reduced by the state/ central bank
4	Retail Inflation is low; Wholesale inflation is high	Retail Inflation is high, Wholesale inflation is low
5	Exchange Rate – Currency Appreciation	Exchange Rate: Currency Depreciation
6	High consumer consumption of goods and services	Low consumer consumption of goods and services
7	Government intervenes by imposing higher taxes	Government intervenes by reducing taxes
8	More Employment Opportunities	Fewer Employment Opportunities

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Economic Situation

During a Bulls market a high GDP growth. Industrial output is on the rise because of the high demand for goods in the economy leading to high sales turnover.

During a Bears Market, low GDP growth is expected. In this situation, industrial output is declining, there is a low demand for goods in the economy leading to low sales turnover.

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Price of Securities

The price of securities is rising, especially those which are high-risk investments.

The price of securities is falling. However, the low-risk investment does well in such an environment.

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Interest Rates

In the case of Bulls, Market interest rates are high. High-interest rates also attract foreign investments.

In the case of a Bear Market, interest rates are low. This is done to motivate investors to invest in the economy.

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Retail and Wholesale Inflation

In a Bulls Market, consumer demands are higher leading to high production. Also, the favorable economic conditions make it easy for industries to boost production output. Therefore, wholesale inflation is higher because employees demand higher wages and suppliers demand higher prices.

In the Bears Market, the production declines. Also, the basic consumer goods, which are food, clothing, and FMCG items, see a rise in price. Therefore, there is a spike in retail inflation.

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Exchange Rate

In the case of a Bulls Market, the demand for domestic currency increases as more and more foreign investors want to invest in the economy. This leads to an appreciation in the currency

Also, it increases the cost of production making exports less competitive. As a result, the growth in Imports is higher than that in Exports.

In the case of a Bears Market, the demand for domestic currency falls as foreign investors pull out investments from the economy. This leads to a depreciation in the currency.

Also, it decreases the cost of production and makes exports more competitive. As a result, the growth in Imports is lower than that in Exports.

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Consumer Consumption

In a Bulls Market, the economy is doing well. As a result, consumer consumption is high because the consumers have more money to spend.

In a Bears Market, the economy is not doing well. As a result, consumer consumption is low because the consumers have less money to spend.

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Taxes

In a Bulls Market, the government intervenes by imposing higher taxes to curtail the amount of disposable income in the hands of the consumer or the producer to prevent the economy from overheating.

In a Bears Market, the government intervenes by reducing taxes. Subsidies are increased to stimulate the amount of disposable income in the hands of the consumer or the producer to boost the economy.

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Employment Opportunities

During a Bulls Market, the economy is flourishing, and the industry is booming, which leads to more employment opportunities.

During a Bears Market, the economy is not doing well, the industries have reduced their production resulting in multiple layoffs. As a result, not only there are zero employment opportunities, but unemployment is also at its peak.

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What Should be the Course of Action in case of a Bull and Bear Market?

During a Bulls market the best way to profit is:

Long Positions – Purchase any stock or any other security in anticipation of a price rise. The overall objective is to buy the stock at a low price and sell it for more than you paid.
Call Options – A call option is when the buyer can purchase a stock at a particular price at a specified future date. Calls go up in value as the underlying stock’s price rises.
Long ETFs – The majority of the ETFs mirror the index performance. Investors buy an ETF if they expect the market it follows to rise

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Different investing and trading strategies can be employed depending on market conditions. During a Bull market the best practices for investing are as follows:

Invest in Growth stocks – Growth Stocks tend to outperform in rising markets. In a bulls market, share prices put greater weight on growth versus other variables such as stability or dividends. Also, these stocks are comparatively more volatile compared to other stocks, but they can also offer higher returns. Also, check out the best swing trading stocks.
Stock Picking – It is easier to pick winning stocks when stock markets are going up. And during a rising market stock picking is all about finding the right companies to invest in.
Passive Investing – Passive investors seek to maximize returns by investing in a diversified portfolio of index-tracking and other exchange-traded funds. Therefore, these strategies tend to outperform active ones during a bull market, which is characterized by low turnover, high returns, and little volatility.

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During a Bears market the best way to profit is:

Short Positions – Investors borrow shares and sell them in anticipation of the falling stock price. In a bear market, this is bound to happen. If the share price drops, you buy those shares at the lower price to cover the short position and make a profit on the difference.
Put Options – A put option gives its holder the right to sell a stock at a particular price. A put option increases in value as the price of the underlying stock falls. In a bear market, this is a profitable course of action.
Short ETFs – A short exchange-traded fund commonly known as an inverse ETF provides returns that are the inverse of a particular index. These ETFs are constructed to take advantage of market declines. Nothing best than benefitting from a downward market via a short ETF. To give investors an idea of where to start and which companies to look for investment in oil and gas, we have compiled a list of the top best oil and gas ETFs to buy now.

Trading during a bear market is very risky. And many investors often get defensive while investing. During a Bears Market, the investment strategies that can help the most are:

Trend Following – This investing strategy means buying assets when they are rising in price and selling them when they are falling. In a rising price environment, a trend follower is a bull trader, and in a falling price environment, they are a bear trader. With the demand for AI technology increasing, investor interest in Artificial Intelligence stocks has also increased.
Value Investing – Value investors look for undervalued stocks which they hold for a long period, even when the market is in a downturn. During a bear market investors often find the best long-term opportunities because prices are falling to more reasonable valuations. This can help investors to ‘buy low and sell high.
Alternate Investment – Diversifying your portfolio is always beneficial. There are multiple alternative investment options available which include forex trading, precious metals like gold and silver, hedge funds, private equity, and real estate. Be mindful, each investment option has its own risks and rewards.

Bottom Line

No doubts bear markets can frighten investors with their losses. But it’s part of an economic cycle and often leads to even stronger market returns. Similarly, Bulls Market seems like investors’ paradise and feels too good to be true.

Therefore, a diversified portfolio that is well constructed to meet your financial goals is the best preparation you can do to survive all cycles f the economy.

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Bull vs Bear Market – What Investors Need to Know