THE USE of the 'bull' and 'bear' to describe markets comes from the way in which each animal attacks its opponents: The bull thrusts its horns up into the air, and the bear swipes its paws down. These actions are metaphors for the movement of a market: If the trend is up, it is considered a bull market and if the trend is down, it is considered a bear market."
It is quite a common occurrence to hear the terms 'bull' and 'bear' used to describe financial market conditions. As an investor, it is important that you understand what these terms signify, how they are characterised, and how each term affects you.
In this final instalment on the stock market, we will examine market trends and learn how the direction of the market is a major force which can adversely or positively impact your portfolio.
THE BULL AND BEAR MARKETS
The 'bull' and 'bear' are idioms most popularly used to capture how the stock market is doing
generally whether it is
appreciating or depreciating in value. Since the market is
determined by investor demand, these terms also refer to the
sentiments toward the market and the ensuing trends.
Primarily, a bull market is a market in which share prices are rising for a sustained period in
an atmosphere dominated by positive buyers. Bull markets propagate optimistic investors who expect that strong market results will persist and, are attempting to profit from this upward movement.
On the other hand, a bear
market "is one that is in decline. Share prices are continuously dropping resulting in a downward trend that investors believe will continue in the long-run."
CHARACTERISTICS OF
A BULL AND A BEAR MARKET
Now that we know that the bull or the bear market is marked by movement of stock prices, it is critical that we become aware of their distinctions. The following list seeks to capture some of the factors that are generally affected by the prevailing market trend, but please note that the list
is neither exhaustive nor
an absolute set of rules for
distinguishing either bull or bear markets.
SUPPLY AND DEMAND: In a bull market, there is strong demand and weak supply for stocks. A large number of investors are demanding stocks while there are a few shareholders willing to sell. Consequently, share prices rise as investors "compete to obtain available equity."
In the bear market, the reverse is true. There are more sellers in the market than there are investors willing to buy. In essence, supply is greater than demand, resulting in a fall-off in share prices.
INVESTOR PSYCHOLOGY: We have already learnt that the market's behaviour is a direct result of the investor's perception. As such, sentiment will determine whether the market will rise or fall. In a bull market, many investors willingly participate with the expectation of making a profit.
In a bear market however, market sentiment is negative and there is significant movement of funds from equities into fixed income securities, causing the stock market to decline.
ECONOMIC ACTIVITY: The businesses whose stocks are traded on the Jamaican Stock Exchange are crucial members of the greater economy. It is argued that a bear market is associated with a weak economy in which a large number of businesses are unable to record huge profits because of the reduction in the consumer's disposable income. This decline in profits unswervingly impacts the "way the market
values the stock" preventing the business from attracting and maintaining investor confidence.
Meanwhile, the bull market is associated with positive economic outlook. Consumers have greater disposable income resulting in greater spending which "drives and strengthens the economy."
WHAT TO DO?
In last week's article, we learnt the characteristics which must exist in a company before we assume share ownership and in the previous article, we learnt that the best approach to procuring wealth in the stock market is by adopting a long-term approach. As an investor, you must remain focused, committed and patient to your investment strategy which leads to sustainable wealth by setting aside emotions and avoiding 'herd buying and selling'.
As an investor, you hunt for and buy great businesses at reasonable prices. The bear market is an ideal time to own some excellent companies at prices below what they are intrinsically worth.
Also, if the fundamentals of the companies, that you currently have in your portfolio, have not changed, then it would only be to your advantage to buy more of those shares at the cheaper prices that prevail during a bear market (a buyer's market).
Please note that the stock market continues to and has historically outperformed every other investment vehicle. As an investor you hold businesses that "are domiciled in industries that have the potential for increasing profits." Buying stocks in a
climate of generally rising stock prices may not lead to your
realising as great a profit margin as you could have if you had bought the stocks at cheaper prices. In essence, the bull
market is ideal for profit taking and as such, is commonly referred to as a seller's market.
Though the bears and the bulls are constantly at odds, the investor can shore up his wealth by taking advantage of these changing cycles in the market.
Remember that at the most fundamental level, supply and demand in the market determines share prices. Like the 'bull and bear' idioms, there are many terms and theories that try to explain the way stock prices move the way they do and unfortunately, there is no one theory that explains everything.
Remember that you are now a learned investor and you are armed with vital information critical to your attaining growing and sustaining wealth.
We welcome your comments at info@ncbcapitalmarkets.com or 1888-4WEALTH.
