Are you planning to invest in the stock market? If you have a plan then you must have an idea about Bull market and Bear Market.
As you know, investing in the stock market is more risky than any other investment. You are probably ready to take the risk.
Where and how you will use your money is entirely up to you. But before you invest your hard-earned money in risky investments, there are a few things you need to know about the stock market, which will help you make your investment decisions and understand the stock market.
What is Share/stock?
Shares or stocks (also known as a company’s “equity”) refer to the ownership of a company, institution or organization.
Every company has ownership, such as ownership of assets, company ownership etc. Stocks determine the part of the ownership. Suppose, ‘ABC’ is a company. It is owned by 10 partners. The capital of the company is $1, 00,000.
This means that each of the 10 owners has invested $10,000 in the company. Now the company or its 10 owners can convert their ownership into shares if they want. However, how many shares of the company will be distributed among these 10 owners will depend on the face value of those stocks. If the face value is $100, then each owner will get 100 shares. Such shares are traded in the stock market.
What is Bull Market and Bear Market?
When the stock market is bullish and the share price is increasing, then that market is called bull market.
And when there is a downturn in the market, it is called a bear market.
There are many interesting stories about comparing the bull market with bulls and the bear market with bears. Although there are doubts about the veracity of these stories. The most common story is that when a bull gets frantic, it jumps upwards.
This is why many people compare the bullish stock market to the rage of bulls. And most of the time bears keep their heads down. This is why many people compare the bear market to the bear.
How Long Does a Bear Market Last?
It is difficult to say exactly how long the Bear Market will last. The Bear Market has an average of 289 days, which is less than 10 months. However, sometimes the Bear Market can last for several years. For example, during the Great Depression from 1937 to 1942, the Bear Market was in effect for 61 months. Again in 1961 the Bear Market was continued for only 6 months.
How Long Does a Bull Market Last?
As I said before, the bull market is usually longer than bear market. Where the bear market lasts an average of 289 days, the bull market lasts an average of 973 days(2.7 years).
The bull market tends to last from a few months to a few years. The longest bull market was from 2009 to 2020. As a result, the stock price rose more than 400 percent.
Characteristics of Bull and Bear Markets (Bull market vs. Bear Market)
Depending on the rise or fall of the stock price, people refer to Bull and Bear Markets. But investors must have an idea of the characteristics of these two markets.
Supply and demand
Bull and Bear Markets are created as a result of supply and demand of securities. The demand for securities in the bull market is very high but the supply is very low. Which is why investors do not want to sell the stock. Share prices continue to rise due to high demand and investors’ reluctance to sell stocks.
On the other hand, there is more supply of shares in bear market but there are less investors to buy shares. Due to this, the share price continues to fall. It is generally considered as a Bear Market when the share price falls by 20% or more.
Investors in the bull market should buy stocks at the beginning of the uptrend and sell them when the price reaches their peak. And when there is a bear market, investors can make income from short-selling, buying inverse ETFs or put options, or turning to safer investments, such as fixed-income securities.
Impact of economic activities
If the economy of the country is expanding and the income of the companies is increasing then it is said that the economic activities of the country are very good. When the economy is in good shape, consumers spend more, which has an impact on the stock market. In such a situation, the share price may go up.
Again, when the state of the economy is not good, consumers reduce their spending, which affects the company’s income. If the company’s income decreases, Earnings Per Share will also (EPS) decrease. So the share price goes down in the bear market.
In a bull market, investors have more confidence. They are encouraged to buy stocks. Share prices continue to rise as investors buy more shares.
In a bear markets, investors reduce the amount of shares they buy. As a result, even if the supply of shares increases, the number of buyers decreases. In the absence of a buyer, the share price continues to fall due to which those who have shares sell the stock at a lower price. It’s a psychological fact.
Related Article – How to Start Investing in Stocks: A Beginner’s Guide
Signs of a Bear market
- The fall will be greater than the rise in the bear market. If the index rises 1000 points, it will go down to 1200 points, while the next Low will be higher than the previous Low and the next High will be lower than the previous High.
- One of the most important signs of the bear market is the declining turnover. The more the market falls, the lower the turnover. Occasionally there will be an average turnover, but it is less likely to be permanent.
- Another sign of a long-term bear market is that the share price will not be devalued, the share price will rise and become overvalued again. As a result, the share price will definitely continue to fall again. The longer the share price is overvalued, the longer the recession will last.
- Ordinary investors will be terrified.
EPS is a Factor in Bull Market and Bear Market
Before buying shares of a company in the stock market, it is very important to get an idea about the financial condition of that company. Each company’s financial statements contain a lot of information. It is not possible for everyone to know and understand all the information.
However, the earnings per share or EPS is one of the most sought information in the stock market. If you have no idea about the stock market, the question may arise in your mind, what is EPS? Yes, I am explaining the matter for you.
The EPS of a company is calculated on the basis of the profit that a company makes after deducting all expenses at a given time. This calculation can be easily found out. Suppose, after deducting all the expenses in 2020, the profit of ‘A’ company is $1, 00, 00,000. The company has a total of 1 million shares. At the end of 2020, the EPS of ‘A’ company will be $10. EPS is calculated by dividing the company’s profit by the total number of shares.
Now the question may arise in your mind, why is it important to know the EPS? The simple answer to this question is, it is important for you to know the income of the company in contrast to the shares you have. Because, the share price is more or less for EPS.
An increase in EPS increases the share price, and a decrease in EPS decrease the share price.
Again the price-to-earnings ratio or PE ratio is determined on the basis of EPS. Borrowing against stocks depends on the basis of that PE ratio.
Simply put, a higher EPS means company is more valuable, and lower EPS means the financial condition of the company is not satisfactory.
What should investors do in each market?
An investor can take the advantage of bull market and bear market. In this case, investors need an in-depth analysis.
In the bull market, an investor can buy shares when the stock price starts rising and sell them when the share price is at its highest. To take advantage of this market investors needs to invest with confidence. Since this time the price of stock continues to soar so you can invest without fear. But don’t be aggressive.
The possibility of loss in the bear market is much higher. This is because the stock price continues to decline during this time. So you have to be very careful when investing in this market. One way to make a profit in this market is to short selling and the other is to invest in secured investments such as fixed-income securities or invest in government securities.
How do you know when the market will fall or rise? It is not a difficult task if you are a little aware or look at the chart regularly.
For those who do not understand the chart, my advice is to look at the index regularly. See how much the index rises or falls every day from the lowest point of any one fall. Keep turnover notes with you.
If you see the turnover is increasing with the index, then assume that the market will continue to rise. And if the index increases, but the turnover decrease, then assume that the market will go down.