What is Bull and Bear Market – Difference and How to Invest?
“Bull” and “Bear” are probably the most used jargons in the stock market sector. If you’re into trading, you should have heard the never ending tussle between bull vs bear market conditions. If you are new to stock market investments, this blog is for you.
What is a Bull Market?
A bull market is a term often used to define a positive movement of indices in the stock market. This means that the overall prices of stocks are rising in the market and the unemployment rate is low, which results in a stable economy. The term bull market is generally applied to anything traded within the stock market like bonds, stocks, currencies, commodities and real estate.
Example:
An excellent example of a bull market in the Indian stock market is the period from December 2011 to January 2015, when the Sensex surged by more than 98%.
The following are the key indicators of a bull stock market
- Country’s increasing GDP
- Increasing stock prices
- Unemployment in the country decreases
What is a Bear Market?
A bear market has the opposite effect of a bull market on security prices. In the case of bear stock markets, stock prices either decline consistently or are expected to decline. This decline can happen over some months or even years.
Similar to a bull market, the meaning of a bear market is also derived from a bear’s aggressive posture where it brings down its claws – an analogy to imply a drop in stock prices.
A bear market indicates a recession where negative growth is seen over a long period. The downward trend or stagnation in the economy convinces many investors to sell their stocks rather than buy.
Example:
The best example in the Indian stock market of a bear market is the period from March 2015 to February 2016, when the Sensex had dropped more than 23%.
The following are the key indicators of a bear stock market
- High unemployment rates
- Falling stock prices
Bull and Bear Markets: Key Differences
A bull phase in the market happens when the market is strengthening or is already strong, whereas a weakening stock market is a sign of a bear market. The difference between a bull vs a bear market is discussed below:
| Factors | Bull Phase | Bear Phase |
| GDP | Typically, one expects high GDP growth in bull markets. Moreover, economic demand increases during this time and industrial output also increases, which in turn results in higher sales and turnover. | During the bear phase, investors expect that the GDP will go down. This dip in GDP leads to a decline in the production of goods, low sales and lower turnovers. |
| Prices in the Economy | Historically it has been noticed that higher-risk stocks give higher returns during this time. Moreover, equity investment returns are also high during this time. | Investors tend to invest more in safer investment options like government bonds, gold investments and bank fixed deposits. Most investors opt for safer options to preserve their capital and maintain a stable income. |
| Interest Rate | The interest rate tends to be on the uptrend compared to foreign markets. Thus, foreign investors invest in the domestic market for higher returns. This helps in keeping the excess liquidity in the income in control. | Foreign investors avoid investing in the market during this period as the RBI reduces the interest rates to stimulate CAPEX and liquidity. |
| Share Market | People tend to buy more stocks as the market is up during this period. | Investors sell a large number of their stocks as the market is down. |
| Inflation | As demand for goods increases, the production pace also increases. This also encourages wholesalers to increase the wages of their employees. | In a bear phase, demand for FMCG products remains stagnant as they are essential products, and there will always be demand for such goods. However, demand for other products decreases steeply. The retail industry gets affected badly during this phase. |
| Employment | Since production increases, the employment rate also increases during this period. Most industries thrive during bull markets. | Due to a sluggish economy, the production rate decreases, leading to layoffs as the company owners try to save expenses. Many companies try to lay off part or majority of the workforce to cut costs. |
| Consumer Sentiment | Every aspect of the economy performs well during this phase. So, consumers usually spend more as they are employed and have stable or increased income at their disposal. | Consumption reduces to a large extent. Many people stick to buying only essential goods. Loss of jobs and lack of money in their pockets prevents most people from buying unnecessary goods and services. |
| IPOs | During bull markets, people generally see an increase in the amount of Initial Public Offering (IPO) activities. | In this phase, the number of IPOs tends to decline. |
The above table shows how bear and bull stock markets have different economic effects.
How to Invest During Bull or Bear Market Conditions?
During bull markets, you might want to invest more in growth stocks as, historically, they tend to perform well. If you are a beginner as a stock investor, you can take complete advantage of this period. Share prices rise exponentially during a bull phase, and if you buy shares during the initial period and sell them when the prices reach a peak, you will make a lot of money.
Typically, losses during a bull period are temporary and minor. Many investors usually sell off most of their investments in a panic during a bear phase. Other investors tend to invest in more stocks to get higher returns. As an investor, you can direct your investments toward buying fixed-income securities rather than equities.
In both bull markets and bear markets, you need to create a stable financial plan for the period. You can take the assistance of a financial advisor to make such a plan. Financial advisors will protect you from making risky propositions in investing.
Moreover, if you are a beginner at investing in the stock market, then you should thoroughly research all the market phases before you start investing. Knowing about the bull and bear market phases and their difference will help you make informed decisions before you start your investing journey.
Your investment strategy and time horizon also decide how you should invest in different market phases.
Example:
If you are a long-term investor, you do not need to change your strategy in bull or bear markets.
Also, to minimise losses incurred due to bear market conditions, diversify your investment portfolio. You could try investing in index funds and have a long term investment horizon as per your financial goals. If that’s an investment avenue you have in mind, you can start investing with Navi Mutual Fund. Download the Navi app, explore a host of low-cost index funds and start investing!
Disclaimer: Mutual fund investments are subject to market risk. Read all scheme-related documents carefully before investing.
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Final Word
Both bull and bear market phases will greatly influence your investment portfolios, but in both cases, you should aim to buy stocks at their lowest price. This way, you can get larger profits when the price increases.
Investors try to analyse the market thoroughly to predict when the next bull phase will appear, but there is no foolproof formula to determine when the market will rise or drop. As a result, you should be knowledgeable about market conditions and stay prepared for changes when investing.
FAQs
Ans: Rakesh Jhunjhunwala is often called the big bull of the Indian stock market. This is because he is known for choosing stocks that would later go on to deliver exceptionally high returns.
Ans: If you refer to the technical definition of a bear market, the Indian share market is not yet in the bear phase as its decline is more than 20% from its peak. In India, the Nifty has only fallen 17.5% from its 52 weeks peak as of June 2022.
Ans: No one really knows how the market is going to perform in the future. Though many experts will claim to have an accurate prediction, it is more likely that investors will hear about all sorts of possible outcomes.
Ans: Bear markets tend to last for at least 9 months. However, it can take up to 3-4 years for the market to recover from its effects. This is not guaranteed to happen, but it is a long-term average.
Ans: Since the 1950s, the global stock markets have experienced bear phases 11 times. The longest bear market was in the early 2000s lasting for 929 days, while the shortest bear phase was in 2020, lasting for only 33 days. The average bear market cycle is almost a year.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
