Bull Market Vs Bear Market

Introduction

Bulls and Bears go about their business in India's stock market regularly. While the market is generally bullish, every once in a while, it becomes bearish for a while. These trends have been part of the Indian stock markets from time immemorial, but do you know what they are? What exactly do bulls and bears do? Why do they appear during a bull rally and disappear during a bear phase?

In this article, we take a look at these two terms and try to understand them better.

Bull Market vs Bear Market

The bull and bear phases keep appearing in the stock markets mainly due to the fear and greed of investors or traders. Fear that prices will fall or greed that they will increase more. When people see the prices going up, they start buying stocks hoping to make money.

This can lead to a bull phase when your stock market is in bullish mode, and everyone is buying stocks hoping to profit from the purchases.

Bull:  A Bull is an optimist or a trader who is still holding his stock or has sold the stock already, but the price has increased, so he has made a profit.

Bear: A Bear trader will sell their stocks when prices go up, thinking it will fall soon. They will try to profit from this fall in prices.

The word "Bull" originated from a well-known investor named "Brilliant Bull". The bull market is commonly referred to as an economic boom or period of increasing prices in financial markets.

In contrast, the term bear market refers to a market condition where stock prices are declining. Another famous saying about the bull and bear is that "the Bull fights with the Bear"; hence, observing stock market movement can be likened to watching a bullfight. When the bulls seem to be winning, the market is in "Bull Market". On the other hand, when this trend changes and the bears take over, the market will be in "Bear Market". 

Thus, it readily becomes apparent that there is panic among investors who start selling their shares at any price during the Bear market period. In contrast, there is euphoria among investors who try to buy more and more shares at a higher price during the Bull market. 

Analysis of the Share Market Bull and Bear

A bull market is a sustained, widespread rise in the prices of securities or, in some definitions, a sustained rise in share prices beyond the standard economic trend. A bear market is a prolonged downturn in the price of securities, characterised by widely falling prices, negative investor sentiment and a large volume of selling mainly caused by fear of further falls in prices.

It is an absence of buying rather than a spike in selling that defines a bear market. A classic "bull" move in stocks is when prices rise beyond fundamental values and investor interest wanes, only to have it return with renewed vigour as earnings are set to improve. This leads investors to buy stocks at inflated levels based on future events they perceive as certain to occur (which they may not).  

As good news appears people begin bidding up stock prices beyond their actual value. At this point, so many investors have become involved that even minor positive news will start an upward spiral that keeps going until prices get so high that negative information causes panic among the investors. 

How does the Stock Market function in the Bull and Bear Waves? 

The market is a mechanism that takes money from the impatient and gives it to the patient.

In a bull market, people who buy stocks are betting that the companies they're buying into will be more profitable in the future. They're hoping that they can sell their stock for more than they paid for it at some point. In a bear market, investors are betting on the opposite. They think companies will be less profitable in the future and that the prices of their stocks will go down.

This is an important distinction. In a bull market, people are optimistic about the future of specific companies. They're pessimistic about the entire stock market as an investment in a bear market—and often for a good reason. A lot of times, when people say "the market's gone up" or "the market's crashed," what they mean is that individual stocks have gone up or down.

But those stock price movements may not have anything to do with the overall health of our economy. A big up day for stocks could mean that one company got bought out and its investors made billions, not that we're on our way to another boom time like we saw in the 90s.

How to benefit from the Share Market Bull and Bear?

The Indian stock market is influenced by the US and European markets which follow their trends. The Domestic market also follows these trends, but never the same way as the international markets.

The global recession that began late last year has had adverse effects on India, like most other countries. However, India's domestic consumption-oriented economy has been less affected than the western economies, considering that India exports almost nothing except software services.

There are several reasons why investors prefer investing in a bull market over the bear market:

1) First reason is to make quick gains in the bull market - because of the high demand for stocks. Investors tend to buy stocks which will give them quick high returns (in general, more than 20%) in bull markets; but in bear markets, they prefer low-risk investments like Fixed Deposits (FDs), which give them lower but safe returns (in general,

2)The market has become more mature, and hence one needs to be careful while investing. Unlike other markets, which can go crazy on specific scenarios, this market does not give you that kind of leeway. Any significant correction will be met with solid buyer resistance, and hence one needs to be cautious while investing in this market. 

3) What's worth mentioning is the fact that the growth story behind each company listed here keeps getting more potent from one year to another. While this is true for all markets, there have been some high profile IPOs recently as well as mergers & acquisitions which have happened here which will keep furthering the growth story of these companies. 

As far as valuations are concerned, though we can see valuations going up, it is not entirely unjustified given the growth trajectory of companies across various sectors.

Wrapping Up

There are two reasons why one should not worry too much about a particular scenario - Firstly, markets do go through cycles, and they tend to be highly volatile. Secondly, one should invest not with a short-term horizon but with a long-term horizon, usually ten years or more. This is because financial assets across geographies have generated handsome returns over time, and that's why we see people coming in full swing to invest in the Indian stock market.