Difference Between Bull and Bear Market

What is a Bull Market?

What is a Bear Market?

Key Differences Between Bull Market vs Bear Market

Bull and bear markets can be considered as differing phases of market behaviour. By understanding their differences, investors will better deal with changing conditions in the financial marketplace. Let's take a look at what makes them different:

Aspect Bull Market Bear Market
Market Direction A bull market occurs when the prices of assets are rising, and the prices of stocks are trending up. A bear market occurs when the prices of assets are falling, and the prices of stocks are trending down.
Economic Indicators Indicates economic expansion with increasing GDP, low unemployment, and strong corporate earnings. Indicates economic decline with decreasing GDP, high unemployment, and weak corporate earnings.
Investor Sentiment Optimistic investors are willing to buy assets, making them less scared or more confident, and asset demand decreases. Pessimistic investors are scared and continue to sell or hold cash, causing demand for assets to decrease.
Supply and Demand High demand for securities meeting a limited supply will push prices higher. Low demand for securities meeting a high supply will push prices down.
Duration Bull markets usually last longer, averaging a historical 6.6 years. Bear markets are often shorter, with a historical average of 1.3 years.
Average Gain/Loss The average cumulative gain is approximately 169%-339% during a bull market. The average cumulative loss is approximately 33%-38% during a bear market.
Investor Behaviour Investors often use strategies such as "buy and hold" to take advantage of increasing prices. Typical behaviour will include defensive strategies such as selling equities or switching to fixed-income securities.
Economic Cycle Phase Occurs during the expansion and peak phases of the economic cycle. Occurs during the contraction and trough phases of the economic cycle.

Indicators of Bull Market and Bear Market

Distinct trends, investor behaviour, and economic conditions define bull and bear markets. Below is a detailed table explaining the indicators of each market type. These indicators help investors identify whether the market is bullish or bearish.

Indicator Type Bull Market Indicators Bear Market Indicators
Market Trend A significant, sustained increase in asset prices, typically 20% or more from the most recent low over several months or years, shows significant upward movement. A significant decline in the price of the assets, typically falling by 20% or more from the most recent high over several months or years, shows significant downward pressure.
Economic Indicators A strong and expanding Gross Domestic Product (GDP) typically signals a strong and growing economy. This leads to increased consumer spending and increased corporate profits. Weakening GDP typically indicates the economy is weakening, which leads to weakened consumer spending and decreased corporate profits and may lead to a recession.
Unemployment Rates Declining unemployment rates and an increase in job opportunities indicate a strong economy and lead to positive market sentiment. Rising unemployment rates indicate economic distress as companies lay off employees and reduce business activity, weakening consumer sentiment.
Volatility Index (VIX) Lower VIX values indicate strong and stable economic growth and positive sentiment by investors. A higher VIX value indicates investors' uncertainty and fear.
Technical Formations Bullish formations (a "golden cross") occur when a short-term moving average crosses above a long-term moving average, confirming bullish momentum. Bearish formations (also known as " death crosses") occur when a short-term moving average crosses below a long-term moving average, confirming bearish momentum.
Market Indexes A sustained increase in major market indexes (e.g., the Sensex or the Nifty 50) suggests a broad market advance and increased investor confidence. A sustained decrease in major market indexes (e.g., the Sensex or the Nifty 50) suggests a broad market retreat and decreased investor confidence.

How to Invest in a Bull Market?

How to Invest in a Bear Market?

Mistakes to Avoid During a Bull Market

Getting into a bull market without a plan can lead to costly mistakes. Below are mistakes to avoid:

1. Blindly Buying Stocks

Do not just buy stocks for the sake of buying stocks, just because the market is moving higher. Get in the habit of researching a stock's fundamentals before buying. Not all stocks move higher in a bull market.

2. Overconfidence

Investors often feel overconfident, which dictates their decision-making. It can lead to too much trading or taking greater and unnecessary risks. Adopt a disciplined approach and do not act excessively speculative.

3. Ignoring Diversification

A bull market can cause investors to overlook diversification because they want to invest in the sectors doing well. If so, you can leave your portfolio open to losses if the market reverses.

4. Chasing Momentum

Do not chase stocks without considering the value or growth potential of the stock you wish to buy. If you invest solely based on momentum, you will lose your investment if that stock no longer continues to increase.

Mistakes to Avoid During a Bear Market

Avoiding the following common mistakes can help keep your investments intact and find opportunities even in a down market:

1. Selling Good Stocks Too Soon

It is important not to sell shares of fundamentally strong companies because they usually will recover when the market recovers.

2. Not Cutting Losses

Hanging on to a company performing poorly and having an uncertain future performance will lead to deeper losses.

3. Avoiding Volatility

If you take a total exit from the market due to volatility, you will miss any future participation and will not be able to dollar-cost average the same stocks at lower prices.

4. Not Considering Long-Term Goals

Sometimes, an investor focuses more on short-term losses and does not think about the loss of a longer-term strategy that may lead to better long-term results.

Similarities Between Bull and Bear Markets

While bull and bear markets are opposites, they certainly have some similarities in defining their financial ecosystem characteristics. The similarities include:

Similarity Bull Market Bear Market
A Phase of the Market Cycle Part of the natural market cycle: expansion, peak, contraction, and trough Part of the natural market cycle: expansion, peak, contraction, and trough
Self-Perpetuating Trends Rising prices attract more buyers, further driving prices up Falling prices lead to panic selling, worsening the decline
Supply and Demand High demand and low supply lead to rising prices Low demand and excess supply result in declining prices
Economic Indicators Positive indicators (GDP growth, employment, profits) boost the market Negative indicators intensify market declines
Global Reach Trends impact other global markets due to financial globalisation Trends impact other global markets due to financial globalisation

 

Bull markets and bear markets are two different approaches to the financial cycle. A bull market is associated with optimism, rising prices, and economic expansion. A bear market is associated with negativity, falling prices, and economic contraction. Once investors identify the different characteristics of the markets, they can develop a plan to manage the financial system's ups and downs.

FAQs about Bear vs Bull Market

What is a bull market?

up-arrow
A bull market describes a period of continuous growth in asset prices, usually represented by a rise of 20% or more from recent lows. This phase is characterised by investors' optimistic behaviours and positive economic indicators.

What is a bear market?

up-arrow
A bear market is associated with a prolonged drop in asset prices, usually 20% or more from recent highs. This phase is typically marked by pessimism and weak economic indicators.

How do bull and bear markets affect the economy?

up-arrow
Bull markets are associated with economic growth (expansion), high employment rates, and increased spending by consumers. Bear markets are associated with economic contraction, rising unemployment, and people spending less.

What triggers a bull market?

up-arrow
A bull market can be attributed to strong corporate earnings, favourable government policies, and validation from investors responding to anticipated future growth.

How long do bear markets typically last?

up-arrow
Bear markets generally do not last as long, with averages of under 1.3 years.

What causes a bear market?

up-arrow
A bear market can be attributed to weak economic data (indicators), warfare, a rise in inflation, declining corporate profits, or low productivity.

How long do bull markets typically last?

up-arrow
Historically, bull markets last longer than bear markets, averaging approximately 6.6 years.

Can investors profit during a bear market?

up-arrow
Yes, investors can earn in bear markets through short-selling stocks, purchasing inverse ETFS, or investing in fixed-income securities.

What are the key indicators of a bull market?

up-arrow
Indicators of a bull market include stocks that are increasing in price, bullish investor sentiment, low unemployment, and a growing GDP.

What are the key indicators of a bear market?

up-arrow
Indicators of a bear market include decreasing stock prices, bearish investor sentiment, rising unemployment, and a declining GDP.

How should beginners invest during a bull market?

up-arrow
Beginner investors can consider investing in stocks expected to grow and take a long-term "buy-and-hold" approach to acquire ownership of those stocks.

How should beginners invest during a bear market?

up-arrow
Beginner investors should consider investing in defensive assets such as bonds or allocating their portfolio more broadly, as the value of most asset prices is decreasing.

What role does investor sentiment play in these markets?

up-arrow
Investor sentiment is a key driver in both bull and bear markets. In bull markets, optimism and confidence lead to increased investment and rising prices, while in bear markets, pessimism and fear cause investors to withdraw, intensifying price declines and prolonging downturns.

What is the significance of the 20% threshold in defining these markets?

up-arrow
The 20% threshold is widely used to define the transition between bull and bear markets. A decline of 20% or more from recent highs typically marks a bear market, while a rise of 20% or more signals a bull market. This benchmark provides a clear, standardised measure for market participants to identify significant shifts in market direction and sentiment.

Are bull and bear markets part of the economic cycle?

up-arrow
Yes, they correspond to various stages of the economic cycle: bull markets are linked with expansion and peak; bear markets correspond with contraction and trough.

Is it possible to predict when a bull or bear market will start?

up-arrow
Predicting the exact moment a bull or bear market begins can be challenging. Economic indicators can usually forecast the direction of a trend in the near future.

Is it better to buy in a bear or a bull market?

up-arrow
Generally, bull markets are considered a better time to invest. Although stock prices are higher, the risk is lower. You're more likely to sell assets at a profit than the purchase price.

Disclaimer

up-arrow

  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

Latest News

Currently there are no news to show.

Read More

Renew & Download Policy Document, Check Challan, Credit Score, PUC & more

Anytime, Anywhere. Only on Digit App!

google-play-icon

Rated App

app-store-icon

Rated App