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What is the first thing that comes to your mind when you think of a bull?
A huge raging beast with horns and a bad temper, right?
And what about a bear?
Please tell me you think about soft cuddly teddy bears.
Now ask yourself, what could such animals have to do with the stock market?
Maybe stock brokers are partial to bovine creatures? Or maybe they are partial to soft toys? Or maybe they have a weird ritual where they pray to these animals before making a trade?
Almost everyday in the investing world, you will hear the terms “bull” and “bear” to describe market conditions. Because the direction of the market is a major force affecting your portfolio, it’s important you know exactly what the terms bull and bear market signify, how they are characterized and how each one affects you.
In the stock market, bulls and bears are in a constant struggle. If you haven’t heard these terms already, you will as soon as you begin to invest.
Just so that you aren’t alarmed the first few times you hear these terms and make a fool of yourself by interpreting them literally, (like I had done), I will explain what these terms mean and why they are used.
I mean, I’m sure you had already figured out what kind of a place the stock market is, right? I’m sure you thought it was dry and serious and all about the money and nothing else. The last thing you would have expected was a farm, right?
Lo behold, it managed to surprise you after all.
Meaning of bulls and bears in share market:
The terms “bear” and “bull” market are used to describe how the stock markets are doing in general, that is, whether they are appreciating or depreciating in value. At the same time, as the market is determined by investors and traders’ attitudes, these terms also denote how investors and traders feel about the market and the ensuing trend.
Let me explain to you what these very confusing terms actually mean.
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. The bull depicts investors who are optimistic about future prospects of the economy and believe an upward trending market is on. Bullish characteristics are when the market is showing confidence,prices increase and market indicators rise. The number of shares traded and the number of companies entering the stock market also increase.
Picking stocks during a bull market is very easy as everything is rosy and going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued.
Let me give you an example to explain the concept a little better.
India’s Bombay Stock Exchange Index, BSE SENSEX, experienced a bullish market for about five years, from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another notable bull market was from 1925 to 1929 in the USA. This trend ended abruptly with the Great Depression.
A bear market is the polar opposite of the bull. It is when the economy is bad, recession is looming and stock prices are falling. Such a market shows a lack of confidence. Prices hover at the same level and then go down, indices fall and volumes are stagnant. In a bear market, people are waiting for the bulls to start driving the prices up again. A bear is like a very tentative bull, or a bull that is asleep.
Unlike a warm soft cuddly teddy bear, bear markets are not very comforting for investors. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling by using a technique called short selling. Another strategy is to wait on the sidelines with bated breath until you feel that the bear market is nearing its end. If a person is pessimistic, believing that stocks are going to drop, he or she is called a bear and is said to have a “bearish” outlook.
An example of the bear market would be the one that followed Wall Street crash of 1929, marking the start of the Great Depression. Another recent example is the bear market between October 2007 and March 2009, which was a result of the financial crisis of 2007-08.
There are two reasons why bull depicts rising market and bear depicts falling market. First, bull swipe up while attacking and bear swipe down while attacking. Secondly, bulls are aggressive and attacking whereas bears wait for the prey to come down.
Apart from bears and bulls, the stock market farm also has lesser known but no less amusing animals.
Stags are those market participants who are not interested in a bull or bear run. They buy the shares of the company’s initial public offering (IPO), and sell them as soon as the stock is listed and trading commences. They do this with the intention of taking advantage of the rising stock prices which enables them to make a quick profit. The act is known as stagging.
Chickens are those individuals who are afraid to lose anything. Like the common English insult, “Don’t be a chicken” is often used to call people on their lack of courage, such investors are so scared of losing their money that they don’t invest.
Their fear overpowers their need to make profits and so they turn to only money market securities or avoid the markets entirely. While it’s true that you should never invest in something that robs you of your nightly sleep, you will also never see any return if you avoid the market completely and never take any risk.
Pigs, on the other hand, are high risk investors looking for the one big score in a short period of time. Pigs buy in hot tips and invest in companies without any due diligence. They are impatient, impulsive, and are generally the ones who burn their fingers and lose money in the market.
Professional traders love the pigs, as it is often from their losses that bulls and bears reap their profits. There is an old saying, “Bulls make money, bears make money, pigs get slaughtered.”
Wolves are powerful individuals who could employ criminal or unethical means to make money. Such individuals are generally behind huge scams which rock the market when they come to light.
The most memorable example of a wolf in recent times is Jordan Belfort, who was convicted of stock fraud and stock market manipulation. He was portrayed by the Oscar winning actor Leonardo Dicaprio in the Martin Scorsese directed movie, “The Wolf Of Wall Street”.
As amusing and entertaining though the myriad fauna of the stock market may be, investors mostly use the terms bulls and bears to denote the movements of the stock market.
Seasoned investors believe that by recognizing the different kinds of markets, one can make money on stock trading and investing. There is, however, a very fine line between a pig and a smart investor. The trick is to toe the line and play it to your advantage.
The basic idea behind buying stocks is to buy low and sell high. This will give you a profit. So, to make money, you buy stocks in a bear market when the prices are low and sell them in the bull market when the prices are high.
The first rule of investing is to take advantage of the fear and greed. So, ideally, you should move almost exactly the opposite way most people are moving in the market place. You should take advantage of the bears and the bulls.
Where most people feel scared or nervous in a bear market, you should be looking to buy Rs. 100 notes for Rs. 50. It’s like going to a flea market where everything is on sale.
However, as I’m sure you’ve guessed by now, knowing when is the best time to buy or sell is not that simple.
Most investors are often too emotional and they end up selling in a bear market because they are too afraid to lose money and they buy in the bull market because they do not want to miss the big game.
Of course, it is possible to make some money this way, but it also explains why many investors lose money by trying to time the market.
How do you get around this problem?
Well, the safest way is to buy stocks and invest in the market regularly, by making investments of a fixed size, and by holding your investments for a longer period of time.
There are plenty of different investment styles and strategies out there. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig.
Make sure you don’t get into the market before you are ready. Be conservative and never invest in anything you do not understand. And don’t jump in without the right knowledge.