The movement in stock market is usually categorised within two broad categories mainly bull and bear market.
What is a Bull Market?
Bull market is a scenario where the investors are confident, optimistic and have positive expectations related to the stocks. This optimism in the market tends to drive the stock prices up in a short time span. The term bull market applies not only to the stock market, but also to other financial markets like bonds, currencies, commodities, etc.
The person who expects the prices to rise is often referred as the ‘bull’ and the people following him/her and buying stocks bought by him/her are termed as herding. This phenomenon is usual in a bull market. Bull market is also called as a bull run but the important thing is that the bull run does not last forever and is very unpredictable on many occasions.
Examples of Bull Market: India’s stock market and Indices were on a bull run from April 2003 to January 2008 where the BSE or Bombay Stock Exchange increased from 2,900 points to 21,000 points. This rally is termed as a bull run.
Bull markets increases the expectation of the investors of further capital gains often resulting in a ‘bubble’ or a ‘crash’ in the financial market.
What is a Bear Market?
A bad economy, pessimism among the investors contribute to lower prices in the stock market and such a scenario is usually referred to as the Bear Market. It is usually based on the economic conditions of a country or the world as a whole. It may also lead to recession in the economy – domestic or global. Like bull, bear market also exists for other financial products – bullion, oil, agri commodities, bonds, currencies.
In a bear market, investors stay away from huge investments which were made in a bull market and this causes financial markets to decline in value rapidly. Market participants usually start selling their holdings when they suspect a bear market. They try to sell borrowed stocks and buy them at a cheaper rate in order book profits in a bear market. This further adds to the drop in prices. It makes difficult for investors to buy stocks for a profit booking perspective in short term, but is a great time to add quality stocks for a longer term. Bear market can sometimes lead to severe cases of unemployment, rising inflation and other economic crisis.
Examples of a Bear Market: India’s stock market witnessed one of its biggest bear market scenario between January 2008 to March 2009 (post the mortgage sub-prime crisis originating in the US) where the BSE fell 62% within a period of 13 months. This was followed by a 162% bull run for the next 20 months till November 2010.
These terms have been used to describe the boom or doom in the financial markets based on the style of attack adopted by each of these animals - A bull attacks with his head down, horns targeted at the prey. After piercing the target, a bull pushes its head up strongly and swiftly, tossing the prey in the air. Hence the swift act of moving up is termed after the bull. In contrast, during an attack, a bear pounces on the prey and presses it down very hard on the ground. Given the massive force exerted by the bear, the prey is grounded without any scope for upturn. Thus, bear signifies the drop which is so sharp and does not stand an immediate chance for recovery.
One point important to note here is that it is difficult to spot or anticipate a bull or bear market. While it is easy to plot them on charts, based on historic price movements, change in trends is not very easy to predict or catch.