If you’ve seen the popular web series that sketches the life of Harshad Mehta, you might remember Bhushan Bhatt explaining to him ‘Mandodiya’ (Bear) and ‘Tejadiya’ (Bull) on his first day at the exchange. He does so because, though not spoken about much, the bull and bear markets form the very basis of market activity. They help investors and traders to take their positions according to the prevalent trend.
But what are they? We’ll try and understand the same. But first, let us first delve into the underlying dynamics of it.
Understanding the Business Cycle
Any market grows based on certain economic principles. One of the most important principles in this context is that of the ‘business cycle’, also known as the ‘economic cycle’ or the ‘trade cycle’. These cycles are the wave-like pattern that gets formed over the long-term growth trend. As the name implies, they involve an upswing (boom) and downswing (slump) as the market moves forward. In essence, the length of a business cycle is the time taken by a boom and a slump in succession.
Truth be told, such booms and slumps are quite frequent in the market and might even happen in a day, week, or month without taking the market into a technical recession. Recession, on the other hand, is a byproduct of the long-term growth trajectory, wherein the economy typically declines for at least two quarters (3-month each).
Now, let’s find out what a bull and bear market is.
Bull Market: The bull market is the state in which the financial market is on the rise and expected to be so in the near future. The ‘Bull’ is derived from the real-world bull, which usually strikes in the upward direction. It begins either at the baseline (during the start of economic activity) or the bottom of the trough (the lower-end) of the cycle. The bull market comes to the fore when the market is strong and the prospects ahead are very lucrative. It tends to reinforce investor confidence, wherein more people want to buy and fewer people want to sell.
Bear Market: The bear market is the exact opposite of the bull market. The financial market in this case tends to experience corrections with stock prices falling and expected to fall in the near-term. Much like ‘Bull’, the ‘Bear’ of the bear market is also derived from the real-world bear, which usually hits in the downward direction. Bear market sets in when there is no further scope of growth as the market gets saturated (with supply exceeding the demand). This typically happens at the height of the Bull-run and continues till the trough is formed.
At this time, more people are interested in selling stocks rather than buying and investor confidence is weak. A recent example could be the last year’s pre-pandemic paranoia, wherein the majority of investors wanted to exit the market as no one knew how the pandemic will unfold.
You must develop a strong understanding of the bull and bear market, and how to read them during the day, week, month, or long stretches of time. A nice idea to do so is by studying relevant books that delve into such concepts. If you learn the art of trading, you can even make profits in a bearish market while maximizing your returns during the bull-run.
By Pranjal Kamra – CEO, Finology