If you are new to the stock market or cryptocurrency trading, you will often hear the terms bull market and a bear market. Well, the terms originate from various stories but the most common thinking is the ferocious attacks made by these two animals. When a bull charges ahead, it thrusts its horns forward in the air while a bear would use its claw to grab down its victim on the ground. Both the movements are metamorphically used by traders and investors to describe the market condition. When the market goes up, it is seen as charging ahead and thus considered a bull market. Alternatively, when the market is dragged down, it is a bear market. But what drives a bear or bull market?
Bull Market versus Bear Market
As discussed, a bull market is a market condition that is on the rise and when the economy seems favourable for traders and investors. Comparatively, a bear market condition exists when the economy recedes and stocks decline in their value. Since financial conditions are mostly influenced because of investors’ sentiments, we use these terms to denote how the investors are feeling about the market or ensuing economic trend.
Typically, a bull market will sustain a price increase. It indicates a steady rise in company share price in the case of the stock market while in cryptocurrency, it indicates a rise or a surge in token value. During such events, investors and traders believe that the upward trend will continue for a significant period and believe that the country’s economy is getting stronger.
Contrastingly, a bear market is one when investors and traders see decline in share worth or token value. However, a market is not considered a bear market unless the value has reduced more than 20% from its recent value. The share of crypto value drops continuously and as a result, the downward trend makes investors sell off their accumulated assets. During a bear market condition, the economy usually slows down and unemployment may rise since the companies start employee layoffs.
Common characteristics of bull and bear markets
Both bull and bear market conditions reveal the stock or cryptocurrency price movement however, a few common characteristics are shared by both of them:
Demand and supply of securities
In a bull market, you encounter a strong demand but a weak supply for securities. Although many investors or traders seek to buy the security in a bull race, they may not get enough since others would not wish to sell them. This results in a further increase in share value as investors compete to acquire the available equity. The opposite takes place in a bear market where more people seek to sell the stock than buy them. Since the demand is significantly less than the supply, share worth drops.
Since the market sentiment is highly influenced and determined by how people react or behave to the market, their emotions and logical behaviour results in the rise or a fall in stock value. It can be said that the market performance and investors’ sentiment are depended on one another. When investors predict a bull market, they participate in buying process hoping to make a profit in future.
The opposite takes place when investors see a bear market approaching and they start selling off to avoid losses. The investors usually avoid to make a further investment until the market has regained or starts showing a positive move. When investors keep their money out of the market for a prolonged period of time, it causes a price decline.
Changes are seen in economic activities
Since the stock market is related to companies whose stocks have been listed, any change in share value can impact the greater economy. A bear market is associated with a weak economy. Since consumers stop spending much on the products or services, companies are unable to make profits. The decline in profits further affects the stock value and the overall country’s economy. However, when a bull market overtakes, a reverse occurs. A strong economy makes people spend more which drives companies’ profits and strengthens the economy.
Bull market versus bear market: which way to go?
From the above discussions and characteristics of both bull and bear markets, the market is certainly unpredictable and investors must be prepared for both. In a bull market, it is good for investors to take advantage of the price surge and keep buying the stocks or cryptos during the rally trend. This can be done using various stock market and cryptocurrency analysis tools and charts.
Once you have acquired the stock or tokens, sell them when they have reached their peak to make profits out of it. It is said that even if investors face losses in a bull market, they are very insignificant and temporary. This means an investor can confidently participate and remain active in the bull market due to the high probability of great returns.
In a bear market, investors need to be more cautious as the chances of losses are higher. Even though you may decide to buy stocks at a lower price, the end of the downturn remains uncertain most of the time for many stocks and cryptos. Thus, to make profits, the best option is to try short selling or making a long-term investment in the form of fixed-income securities.
You may also try to deal with defensive stocks in the bear market whose performance is minimally impacted due to changing market trends. The defensive stocks are valuable for both economies as well as investors in the long run. Utilities or services provided by the government, regardless of economic conditions, are examples of these. You may also benefit from a bear market by taking a short position and profiteering from the falling price seen in crypto tokens. For this, learn short selling techniques, buying in inverse exchanges or buying put options.