Amid all the talk about crypto and the stock market, you may observe that market performance just boils down to one of two descriptions: Bull vs. Bear markets. But what exactly are these terms and how do they relate to the stock market? Learn more about the bull and bear markets in this article.
What are Bull markets?
A bull market is defined as an uptrend in stock prices and favorable economic conditions. Bull markets are often followed with optimism. You might be familiar with quotes like this: “I’m quite bullish about this asset”. What the speaker means in this context is that they are optimistic that such an asset will perform well in the market.
The bull market can be likened to the activities of a bull when attacking its prey. A bull will usually push its horn in an upward direction. Now think of the bull’s horn as the market. The upward movement of the bull’s horn signifies a relative upward movement of the market.
It is a common understanding that a bull market is characterized by an increase in price. However, bull markets can only be satisfied under a condition. For a market to be considered bullish, assets’ prices would have to increase by at least 20% after receding by 20% twice. So you cannot just call a market bullish based on little improvement. It can only be referred to as a bull market when it hits the 20% mark.
Bull markets are wins for the economy since they cause relative growth outside the stock market. Better conditions are usually brought to people associated with the bull market as regards GDP, employment, and economic growth.
What are Bear markets?
A bear market is referred to a continuous downtrend in stock prices and unfavorable market conditions. As opposed to bull markets, bear markets are met with feelings of pessimism concerning a stock’s price. When someone says that they are bearish about an asset, it simply means that they feel the price of the asset will drop.
The term “bear market” was gotten from the old days when trading bearskins were common. Traders would sell bearskins they had not gotten yet and expect a price decline. Conversely, bull traders usually expected a price increase. A bear market can also be associated with a bear’s actions when attacking prey. Bears would usually attack by striking their claws in a downward motion. So you can view a bear’s claws as the market and when it strikes down, it means that the market is also facing a downtrend.
On a statistical approach, a market is officially bearish when its prices reduce by 20% since its previous uptrends. Like a bull market, a bear market could run anytime from days to years. However, any price situation can change sporadically, considering market volatility.
A persistent decline in stock prices could cause a relative downturn in an overall economy. Bear markets could lead to a failed economy, poor GDP, and low levels of employment.
What causes Bull markets and Bear markets?
We need to keep in mind that the prices of the stock market do not just change spontaneously. There are usually factors that account for their changes. Let’s take a look at some of the causes of bull markets and bear markets.
- Global events: A plethora of historically significant global events have caused a paradigm shift in the state of the market. Events like wars and pandemics have accounted for most of the most tragic bear markets the world has witnessed. A good instance is the effect of World War I and World War II on the stock market and economy at large. The fresh hit of the pandemic in March 2020 caused a deep plunge in the stock market. However, the market managed to get back up despite the deplorable situations happening in the world.
- News: If you know the stock market well enough, then you should be aware that it is largely driven by news. There is even a trading strategy known as the news trading strategy, where investors monitor the news and use it to determine their next actions. Let’s assume that a popular figure says something positive about a particular asset. This will lead a lot of people to buy that asset causing its price to increase, which in turn leads to a bull market.
- Recession: Recession is one of the leading causes of a series of plunges in the stock market. A general negative state of the economy could cause bear markets. We can see this in recession instances caused by war, pandemics, low GDP, and geopolitical factors.
Bull vs. Bear Markets: the differences
One major difference between the bull and bear market is that the bull market signifies a steady rise in the prices of stocks, crypto, and other similar digital assets. The bear market, on the other hand, signifies a free fall in the prices of digital assets.
During the bear season (which the digital assets market like crypto and stocks is currently experiencing), there is usually a particular fear and skepticism in the market.
Usually, many investors panic and sell in a bid to recover losses. They are also scared to invest again for fear of losing their capital even further.
This is not the case in the bull season. In the bull season, most investors choose to sell a bit for the sole purpose of taking profits, and they might choose to hold the rest for future profits. Also, there is a high level of confidence, and most people feel safer investing during bullish seasons.
Another difference between them is that there is also a general perception of a strong economy during the bull season. Everyone is optimistic and hopeful for the profits it brings.
However, the bear season isn’t met with such emotions. Some investors are thrown into despair for fear of losing too much. There is generally a feeling of trepidation during the bear season.
The truth is, the bull and bear markets are normal seasons the market encounters. The economy is not always rosy, and every seasoned investor knows this.
This is why it is important to have enough knowledge and conduct proper research before investing in any digital asset because the market will always be affected by bull/bear seasons.
How to invest during a Bull Market
- Buy early: Investing in the early stages of a bull market is crucial to an investor. You want to ensure that you take in as much profit as possible. Hence, properly gauging the start of a bull run and investing as early as possible is important.
- Take profits regularly: Even if a market is bullish, the market could still take its course with slight fluctuations. This is why you should take in profits to avoid as many losses as possible.
- Strategize exit points: Bear in mind that a market might not always be bullish, so you need to always be prepared for exiting the market. Hence, you need to apply effective exit strategies.
How to invest during a Bear Market
- Diversify your portfolio: Portfolio diversification is important to reduce risks in investment. The market has its periods when bear runs can be experienced all through the stock market. However, not all assets are affected the same. This is why it is important to spread your money across different investments to reduce losses.
- Utilize dollar-cost average: Dollar-cost average is a trading strategy where a total investment amount is split into equal parts and invested periodically. This is another way to minimize risks in a bear market.
- Limit orders: A Limit order is a type of order where assets are set to be bought and sold at a certain price. For instance, an investor will buy stock ABC only when its price reaches $10. Assuming the price was $15 when he originally set the order, the asset would have to face a downtrend over a period and reach its target price of $10 before it can be bought.
As explained earlier, the bull and bear seasons are normal seasons for a market to experience, as the economy is not constantly strong. In the crypto world, coins pump and dip for different reasons. It could be as a result of a general market crash, a fault in the project, or even a rug pull. The latter two factors can be avoided by conducting proper research before investing in any project.
Either way, it is essential to be conversant with the different seasons— bull and bear, so that you can easily navigate your way around investments. Try as much as possible not to panic in bear markets to avoid mistakes. Also, keep in mind to take profits when the market is on a bull run to recover your losses during the bear season. Just like you can earn profit during a bull market, you can also take advantage of a bear market with strategic entry points. In summary, be calm, be informed, do your research and make wise decisions.
Founder & CEO of Vestinda.
Compacting years of investment portfolio building into just a few minutes.