Two of the most common terms describing our financial markets are “bullish” and “bearish.” If you’re a financial newbie, learning the lingo might seem daunting, but knowing these terms is actually a good starting point for understanding market trends over time, to help guide future investment decisions.
So what is a bull or a bear market? The easiest way to think of “bull” and “bear” to describe markets is to remember one fact about each animal: Bulls charge ahead fiercely, while bears hibernate for a long winter. Another way to understand these terms comes from how these animals attack their opposition.
A bull thrusts its horns up in the air, while a bear swipes its paws down.
These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.
In financial terms, a bull market is when share prices have risen at least 20% from a major low, for a sustained period, which encourages buying. It is characterised by optimism, investor confidence and expectations that strong results will continue. This positive investor sentiment develops when the economy is strong, with a low unemployment rate and steady inflation. But what causes these prices to rise? As the market is governed by laws of supply and demand, prices will continue to rise if there are more buyers who wish to buy shares at a given price than there are sellers who are willing to part with their shares at that price.
Conversely, a bear market shows a downward market trend, when prices have fallen by 20% or more from a peak, for a sustained period. In bear markets, increasing pessimism and decreasing investor confidence are the prevailing psychological determinants, which in turn decreases the demand for stocks. Bear markets tend to develop when the economy enters a recession, with high unemployment, and rising inflation.
If you’re just starting out in finance, knowing the lingo and recognising these trends can help inform some investment decisions. But remember that a sound investment strategy involves research, education and a long term approach.