Stock markets are considered as a volatile investment avenue owing to continuous and fairly unpredictable cycles of price rises and price declines. Stock market prices are generally driven by several factors including economic conditions and investor sentiments.
This article looks at meaning of and differences between two phases of the cyclical behavior of the stock market – bullish market and bearish market.
Definitions and meanings
A bullish market represents the state of the stock market when prices of its stocks are on the rise or are expected to rise. While there is no specific formula to determine when a market turns bullish, it is widely accepted that a scenario in which stock prices rise by 20% or more post a decline indicates a bullish market.
While there may be several factors that contribute to a bullish market, some of them include:
- Strengthening economy and gross domestic product
- Response to favorable government policies
- Increased employment levels
Bullish market is generally driven by optimistic investor sentiment wherein it is believed that prices have begun to rise or that they are going to rise. A bullish market generally continues till investors believe that prices will keep rising.
A bullish market is surrounded by an optimistic sentiment and thus attracts international investments and sees high IPO activities.
A bearish market is exactly opposite of a bullish market. It represents the state of the stock market when prices of its stocks are falling or are expected to fall. It is widely accepted, that a market turns bearish when its stock prices fall by 20% or more following recent highs. It indicates a sustained period of falling prices.
A bearish market is characterized by pessimistic investor sentiment. It is generally triggered due to several factors including:
- Recession in the economy
- Low demand in the market due to low income levels leading to low levels of production
- Unfavorable government policies such as increased corporate taxes
Difference between bullish market and bearish market:
The difference between bullish and bearish has been detailed below:
- A bullish market is a phase of the stock market when its stock prices are rising or are expected to rise.
- A bearish market is a phase of the stock market when its stock prices are falling or are expected to fall.
2. Investor sentiment
- A bullish market is characterized by positive investor sentiment regarding market movements and market trades.
- A bearish market is characterized by negative investor sentiment regarding market movements and market trades.
3. Contributing factors
- A bullish market is driven by growing economy and strengthening economic conditions.
- A bullish market is driven by recession in the economy following changes that impact the economy negatively.
4. Investor behavior
- In a bullish market, investors are positive and look to buy stocks, hold them in anticipation of rising prices and sell them when they believe they have reached their peak.
- In a bearish market, investors negative outlook makes them liquidate their stocks to cut their losses, this further pull down prices of stocks.
5. Demand for stocks
- In a bullish market, the demand for stocks is on the rise as investors rally to buy stocks to take advantage of rising prices.
- In a bearish market, the demand for stocks decline as investors scurry to liquidate stocks to cut losses in anticipation of further decline in prices.
6. Impact on international investments
- A bullish market tends to attract international investments on a positive outlook of rising prices.
- A bearish market is characterized by a negative outlook towards future prices and not only may not attract further international investments but may cause international investors to begin withdrawing from the market as well.
Bullish market versus bearish market – tabular comparison
A tabular comparison of bullish market and bearish market is given below:
|Cycle of rising prices in the stock market||Cycle of falling prices in the stock market|
|Strengthening economy||Recession in the economy|
|Buy and hold to take advantage of rising prices||Sell to cut losses in times of falling prices|
|Demand for stocks|
|Impact on international investments|
|Attracted||Stable or declining|
Conclusion – bullish market vs bearish market:
Both bullish market and bearish market are cyclical i.e., one will follow another. In a bullish market scenario wherein prices keep rising, a phase will come where prices reach its peak and begin their downward slide – this generally marks the beginning of the bearish market. The bearish market will eventually be followed by beginning of a bullish phase once triggered by positive economic factors and so on and so forth.