Bull Vs. Bear Market: Knowing The Differences

culled from:bankingsense.com

What is the difference between a “bull market” and a “bear market”? While you may have heard of the terminology, do you really understand the dynamics of these two market trends? Here are the key differences between a bull and bear market.

Herd Mentality
The stock market has many different individuals involved: corporate executives, bankers, stock brokers and individual investors. The majority of people who invest only have a small understanding of why a stock price changes. Many people can’t see the forest for the trees and make decisions based on what others say and do.

Stock markets are full of emotions – fear, greed, happiness, sadness and anger. It is easy to forget the fundamental economic laws of supply and demand, scarcity and inflation in the heat of the moment. The true professionals understand technical analysis or the “tale of the tape.” The average man follows the herd.

Marketing professionals understand the herd mentality – the average man mimics the behavior of the successful. How many people purchase championship jerseys after a college or professional sport’s team wins it all?

According to Investopedia, a bull market is defined as “[a] financial market of a group of securities in which prices are rising or are expected to rise.” This is quite a broad definition. As an asset price closes at a higher level one day, people expect it to rise even higher the next day.

Bull Market Breeds Happy Days
Investopedia describes a bull raising its horns with an air of confidence looking upwards. One day’s success breeds optimism, confidence and higher expectations. Word-of-mouth begins to spread the good news. The mainstream media starts to fuel the fire in order to increase the interest in the stock market.

Cable news personalities might show you graphs of how high stock prices have risen. Stockbrokers make the most money during bull markets because demand is high. Human psychology leads to greed as people want to be part of a hot bull market – some “must own a stock at any price level.” People will tend to be more optimistic while interpreting economic reports.

Market capitalization increases, banks have more margin capital available and corporations can use their stocks to buyout other firms. Sentiments and actions are different based on whether the market is a bull or bear. Greed, happiness and “irrational exuberance” all drive the bull market higher.

Bear Market – Bottom Falls Out
But when stock prices begin to fall – the entire cycle is reversed. Economic reports are interpreted more negatively, the media discusses how much money investors have lost and the banks make “margin calls.”

Pyramid schemes begin to collapse as the asset values crumble. Creditors want real money, not paper promises. Assets go down even further as buyers are difficult to find.

Fear reigns as investors wonder if their asset values will decline to zero. Investors who lose money become angry at their brokers who promised a “sure-fire winner.” Growing distrust leads to fewer people investing in the stock markets.

Usually, during a bear market there is also finger-pointing. People file lawsuits and want to assign blame for their financial failure. Investors become more conservative, prudent and wary during a bear market.

Many people will make money during a bull market. Higher stock valuations create pyramids of wealth. In stark contrast, many people will lose money