THE BULL AND BEAR MARKET

BULL AND BEAR MARKET

DEFINITION of 'Bull Market'

A financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

INVESTOPEDIA EXPLAINS 'Bull Market'

Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. It's difficult to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets.

The use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.

Learn how you can profit in a bull market by reading Banking Profits in Bull and Bear Markets and also How to Adjust Your Portfolio in a Bull or Bear Market.

Bull Market

A bull market is when the market appears to be in a long-term climb. Bull markets tend to develop when the economy is strong, the unemployment rate is low, and inflation is under control. The emotional and psychological state of investors also affects the market. For example, if investors have faith that the upward trend in stock prices will continue, they are likely to buy more stocks. If there are more buyers interested in buying shares at a given price than there are sellers who are willing to part with their shares at that price, stock prices will continue to rise.

Bear Market

A bear market describes a market that appears to be in a long-term decline. Bear markets tend to develop when the economy enters a recession, unemployment is high, and inflation is rising. Investors lose faith in the market as a whole, which in turn decreases the demand for stocks. Keep in mind that a sustained bear market is something that you should expect to occur from time to time, and that, in the past, the stock market has risen more than it has declined.

Some analogies that have been used as mnemonic devices:

Bull is short for "bully", in its now somewhat dated meaning of "excellent".

• It relates to the speed of the animals: Bulls usually charge at very high speed, whereas bears normally are thought of as lazy and cautious movers—a misconception, because a bear, under the right conditions, can outrun a horse.
• They were originally used in reference to two old merchant banking families, the Barings and the Bulstrodes.
• The word "bull" plays off the market's returns being "full", whereas "bear" alludes to the market's returns being "bare".
• "Bull" symbolizes charging ahead with excessive confidence, whereas "bear" symbolizes preparing for winter and hibernation in doubt.

ORIGIN OF THE STOCK MARKET TERMS “BULL” AND “BEAR”

For those who don’t know, a “bear” market, or when someone is being “bearish” in this context, is marked by investors being very conservative and pessimistic, resulting in a declining market generally marked by the mass selling off of stock.  A “bull” market is simply the opposite of that, with investors being aggressive and positive, with stock prices rising as a result of this optimism.  This “bull” and “bear” terminology first popped up in the 18th century in England.

There are a couple different possible sources for the “bear” part of this tandem, but the leading theory is that it derived from an old 16th century proverb: “selling the bear’s skin before one has caught the bear” or alternatively, “Don’t sell the bear’s skin before you’ve killed him,” equivalent to, “Don’t count your eggs before they’re hatched.”

By the early 18th century, when people in the stock world would sell something they didn’t yet own (in hopes of turning a profit by eventually being able to buy the thing at a cheaper rate than they sold it, before delivery was due), this gave rise to the saying that they “sold the bearskin” and the people themselves were called “bearskin jobbers”.

The use of the word “bear” in this way was popularized thanks to one of the early market bubbles known as the South Sea Bubble.  While it was a long and incredibly complex market scheme that led to the bubble, the gist of it was that the South Sea Company, formed in 1711, was granted by Britain a monopoly on all trade to South America and would be given an annual sum (6% interest plus expenses) from the government.  In exchange, the new company agreed to take over large portions of the government’s debt. (In fact, this was primarily how the company actually made money throughout its century and a half it was in business, simply by dealing in government debt.)

Thanks to this deal and an amazing amount of government corruption, insider trading, and other unscrupulous practices by certain shareholders who knew well that the company’s trade business had little hope of ever being profitable, the burgeoning company’s stock soared. At its peak, based on the stock price, the company was worth about £200 million (by purchasing power, today this would be about £24 billion or $37 billion; by average earnings, it would be £350 billion or $537 billion).

Besides the fact that they didn’t even have their first trading shipment until 1717, 6 years after the trading company first formed, one of the problems was that having an exclusive monopoly on trading to South America from the British government at the time wasn’t saying much as most of the region was almost entirely held by Spain, who Britain was at war with.  Nevertheless, amid rampant and widely published rumors (deftly planted by certain stock holders to jack up the price) of the vast wealth from gold and other resources in those regions and the potential promise of soon securing trade rights from Spain, the stock prices soared, even though the company itself wasn’t really doing any actual trading and their main asset, the monopoly on trade to Middle and South America, was essentially worthless, as the core stock holders knew well.

Spain did eventually grant the South Sea Company rights to trade in the regions held by Spain, but only one ship load per year total was allowed in exchange for a percentage of the profits.  Needless to say, the inability to do any actual real volume of trading and the fact that war once again broke out in 1718 between Spain and Britain causing much of the company’s scant physical assets to be seized by Spain, the market crash that followed wasn’t pretty.

As to the “bull” name for rising markets, in this case we have to do a little more speculation as the documented evidence just isn’t there. The leading theory is that it came about as a direct result of the term “bear”.  Specifically, the first known instance of the market term “bull” popped up in 1714, shortly after the “bear” term popped up.  At the time, it was something of a common practice to bear and bull-bait. Essentially, with bear baiting, they’d chain a bear (or bears) up in an arena, and then set some other animals to attack the bear(s) (usually dogs) as a form of entertainment for spectators seated in the arena.

While bears were one of the more popular animals to use in these games, bulls were also commonly used. More rarely, other animals were used such as in one instance where an ape was tied to a pony’s back and dogs were set on them.  According to one spectator, the spectacle of the dogs tearing the pony to shreds while the ape screamed and desperately tried to stay on the pony’s back, out of reach of the snapping jaws of the dogs, was “very laughable”…

In any event, the popularity of bear and bull baiting, along with perhaps the association with bulls charging, is thought to have probably been why “bull” was chosen as something of the antithesis of a “bear”, shortly after “bear” first popped up in the stock sense.  But, of course, we can’t be at all sure on this one as there wasn’t the more lengthy documented progression of definition as with the “bear”  term.

Bonus Fact:

A common myth often put forth as to the origin of “bull” and “bear” market terminology is that it comes from the last names of two prominent banking businesses, the Bulteels and the Barings, the former supposedly tending to be extremely aggressive in their investments and the latter supposedly being much more conservative.  While both the Barings bank and the Bulteel bank did in fact exist, there are a couple problems here. The first is that the only Bulteel bank around this era wasn’t prominent at all, certainly not enough to spawn such a term. Second, and more importantly, is that both the Barings bank and the Bulteel bank were founded well after “bull” and “bear” were already common stock market terms.

The actual origins of these expressions are unclear. Here are two of the most frequent explanations given:

The terms "bear" and "bull" are thought to derive from the way in which each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down. These actions were then related metaphorically to the movement of a market: if the trend was up, it was considered a bull market; if the trend was down, it was a bear market.

Historically, the middlemen in the sale of bearskins would sell skins they had yet to receive. As such, they would speculate on the future purchase price of these skins from the trappers, hoping they would drop. The trappers would profit from a spread - the difference between the cost price and the selling price. These middlemen became known as "bears", short for bearskin jobbers, and the term stuck for describing a downturn in the market. Conversely, because bears and bulls were widely considered to be opposites due to the once-popular blood sport of bull-and-bear fights, the term bull stands as the opposite of bears.

Read more: http://www.investopedia.com/