What are bull and bear markets?
If you want to start investing in the financial markets you need to understand the meaning of the words ‘Bull’ and ‘Bear’ markets. This is because they describe the major forces at work within the market which can directly affect your portfolio. They are to be found in thousands of articles, press releases and T.V. interviews every year - you probably know their meaning already!
Let’s clarify these terms. The origin of the terms ‘Bull’ and ‘Bear’ markets are actually somewhat disputed. Some historians believe that Bull and Bear markets were named after the way in which each animal attacks its victim. When a bear attacks, it swings its paws down, hence a ‘Bear’ means a decline in the market. On the other hand, when a bull attacks, it swings it horns up, hence a ‘Bull’ represents an increase of market prices.
Alternatively, some say the origins more likely came from when a bear attacks, it lowers its head to scare its opponent, hence a ‘Bear’ market means a decline in price and a negative sentiment in general. On the other hand, when a bull attacks, it rears its head, hence a ‘Bull’ market representing an increase in the price and positive sentiment. Whatever the origin, the Bull and Bear terms can be applied to anything that is traded, such as bonds, currencies, stocks and commodities!
We can talk about Bull markets when the economy is doing well, unemployment is low, gross domestic product expanding and stock markets are rising (for example). As, in such a scenario, it is only natural that investors would be optimistic, there are typically more buyers than sellers which causes an overall rise in prices.
The opposite scenario, known as a Bear market, is a situation in which the economy might be performing badly and stock prices are falling which causes a general downward spiral so the investors are best described as pessimistic and feel a tendency to sell.
Of course, none of either example can last forever, and it is almost impossible to predict consistently when the trends will change.
Buyers and sellers
Bull and Bear markets are an easy way of explaining the interaction of buyers and sellers, and to distinguish between the two types of mind-sets in trading, namely bearish (sellers) and bullish (buyers). Bears think prices are going to get worse, while Bulls believe prices will continue going up. The bearish position is called short, and the bullish position is known as a long.
And that’s it. A very simple explanation of two terms that you will hear a lot in your trading career!