We have all heard of the terms “bulls” and “bears” used when describing underlying market conditions. Most of us are already aware that a bullish market is defined by an aggressive rise in the aggregate values of underlying assets (such as the price of gold during the early portion of the 21st century). In this case, greed tends to rise above fear and as a result, more equity is seen across the marketplace. On the contrary, bearish markets are dictated by a downturn in the price of stocks for an extended period of time. Investors become more averse to risk and thus, fear tends to reign. However, what are some of the other differences between these two markets? In order to make use of the efficient trading platforms, it is a good idea to look at these two markets in a bit more detail.
- 1. The Brevity and Impact of Rallies
Bullish and bearish markets both experience short-term rallies. However, it is critical to appreciate that a rally within a bearish market is often associated with a massive correction immediately following a sell-off. This is once again due to the risk-averse stance associated with poor market conditions. The reason this is important is that many investors will be surprised at a dramatic post-rally correction. In turn, they may fail to liquidate their holdings and lose any profits that could have otherwise been realised.
- The Supply-and-Demand Ratio
In a bull market, we will see a strong demand for securities alongside a notably weak supply. In other words, most investors are looking to purchase assets as opposed to liquidate them. This is the primary reason that share prices will continue to increase. As traders compete for amenable buy-in rates, the equity of underlying assets rises.
The exact opposite is true in reference to a bear market. The demand for securities is weak while the supply is strong. Thus, aggregate prices fall as more and more investors sell. An extreme example of this was seen in 2008 when the Dow Jones Industrial Average fell 679 points (7.3 per cent) within a single trading session.
- Increased Investments Into Safe Havens
This could also be termed as investor psychology. As we had mentioned briefly above, most traders are rather pessimistic in regards to the medium-term outlook of bearish markets. They are less willing to take chances and as a direct result, money will shift into more stable havens such as commodities and precious metals. As we can assume, the exact opposite tends to be true during a bullish trend. As more and more assets are believed to be profitable, there can be a hiatus from commodities back into equities and similar positions.
- The Condition of Small- and Medium-Cap Companies
During a bear market, small- and mid-cap companies tend to suffer; less investors are willing to take chances on their success. On the other hand, bullish markets offer excellent conditions for these same firms, as the possibility of enjoying higher profit margins is more realistic. Many smaller firms are therefore wise not to enter into an IPO position if a bearish market is on the horizon.
- Economic Ties
Bearish markets have always been associated with weak economic output. Consumer spending drops, businesses have to curtail their services and as a result, their inherent value falls. Of course, bullish conditions provide extra room for growth. This is one of the reasons why investors tend to buy at the very end of a bullish period; the prices of many securities are dramatically undervalued.