Two of the most important terms to understand in stock trading are a bull market and a bear market. You may have heard this terminology before, but might not have a complete grasp on what the differences are between these two types of market trends. The terms bull and bear aren’t just used to describe general market trends, but are also used to describe investors themselves.
So what are the differences between these two market trends?
Upward vs. Downward Trends
The fundamental difference between a bull and a bear market is that a bull market signifies upward movement while a bear market is one that appears to be on the decline. These concepts are nicknamed bull and bear because of the behavior of these respective animals.
Think of it this way: a bull generally charges forward with enthusiasm and vigor, while a bear tends to be associated with a sense of lethargy and hibernation.
As well as these trend-based terms applying to stocks, they also often refer to other asset categories, such as forex and bonds.
Economic Confidence vs. Uncertainty
When we hear analysts and financial professionals discussing a bull vs. bear market, the numbers might not even be indicating dramatic upward or downward movements. Much of the difference lies in the psychology of these markets.
A bull market may occur not because the stock market experiences a significant acceleration, but perhaps because a key economic data point comes in strongly, such as the unemployment rate or earnings reports.
At the same time, the result can be similar when psychology is negative. A data point that comes in below expectations can lead analysts and investors to determine a market is in a bear phase, even if stock prices are relatively steady.
Supply vs. Demand
When a bull market is underway, the result is frequently a high level of demand and a low supply for securities. This means investors are seeking out securities at a higher rate than those investors who are willing to sell them. When this happens, it can lead to competition for equity.
On the other hand, with a bear market, you’ll find more people are trying to sell their securities, as compared to those looking to buy them. When supply is higher than demand, the prices of shares go down.
Strong vs. Weak Economy
One of the reasons not only investors but the general public tends to become concerned when they hear the term bear market is because it carries repercussions outside of trading, although the order that those happen can vary.
A bear market indicates the economy is weak or is heading toward something like a recession, but it may be that a weak economy leads to a bear market.
When the economy is strong, the thought is investors have more money to spend, so they’re going to buy more stocks. Therefore, prices will go up, as will demand.
Summing Up
While bull and bear are two important terms to understand when exploring essential stock market terminology, it’s also worth noting that these don’t necessarily have to reflect long-term movements. These terms may just refer to short-term trends, although the longer a bear market goes on for, the more likely there is going to be some serious economic consequences.