What are Bull and Bear Markets?
There are a lot of ‘animal’ slang words in finance and there are many reasons for that. One of those reasons is that investors are animals too and sometimes they behave in the irrational, herd-ish ways.
Today we’ll take a look at two of the most famous ‘animal’ terms in finance: a bull and a bear market.
Three Main Market Trends
A market trend is a direction where the price is moving.
There are 3 main trends that can be observed in any market (currencies, stocks, bonds, commodities, etc.):
- Upwards - bull trend when a price is increasing, rising
- Downwards - a bear trend when a price is decreasing, falling
- Steady - a stable trend with no significant changes in the price
These trends are usually observed for a group of assets, but they can also be used to analyze any particular asset. A good place to observe a trend would be a market index such as S&P 500. When it goes up it means that the stock market is growing, in aggregate. Some stocks can actually go down at the same time but this trend shows us that market attitude towards stocks is positive at the moment.
What is a Bull Market?
When people talk about a bull market, they mean that this market is faring well at the moment and prices are going upwards. The growth expectations are positive and optimistic, investors are buying stocks or securities and it all leads to further growth. As most investors prefer standard deals (buy it cheap and sell it when the price goes up) many people are making money on such a market and they are happy. It’s against the nature of most of the people to bet on negative outcomes (also called ‘short sale’ or ’to short’).
Another common term for such a market is ‘Booming’. It usually happens when a country’s GDP is growing as well as the aggregate demand. Some sources say that a market can be called a ‘bull market’ only if prices go up by at least 20%.
A trend always implies a certain period of time, usually longer than a few hours or a couple of days.
What is a Bear Market?
A bear market is the exact opposite of the bull market. It’s a situation when the market falls down, people have negative and pessimistic expectations and many market players decide to sell their assets.
Although some people, usually a minority, are prepared for such a dramatic development of events, thus they can make money even while the rest of the market players are losing.
The terms like ‘Market Crash’ or ‘Crisis’ are often used with similar meaning.
Examples of Bear and Bull markets
It’s common to talk about a trend in terms of a certain time frame (a set of historical data is required to make a conclusion about the trend). For example, the S&P 500 index has been growing steadily from 2,500 in January to 2,900 points in May. This period of 4 months can be called a bull market.
Another real-life example would be the big market crash of 2009 when the same index dropped from 1,200 points in September to 760 points in just 3 months. This was a free fall, not quite a bear market, however, if we look at the history it was a bear market for a few years starting from 2007, but only in 2009, it reached a critical point.
What is The Origin of These Terms?
It’s unclear what is the origins of these terms, but there are two main theories:
Those market trends are named after bears and bulls because of the strategies that those animals employ in order to fight with their enemies. Bears are trying to drag an opponent downwards with their massive claws, and bulls are horning their victims up into the air. Also, a bull is an active animal that likes to run fast, and a bear can sleep for months winter and it’s usually slower (but not when in rage).
According to MiriamWebster.com the term ‘bear market’ might have come from the past when bearskin traders would make a futures deal to resell a bearskin which they did not receive from the trappers yet. They were hoping for a low price of skin so they can make more money on the final sale. The ‘bull market’ came a bit later and it meant the opposite of the bear market because bears and bulls were thought to be enemies due to an old blood sport of bull-and-bear fights.
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