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Digging Deeper Into Bull and Bear Markets
Almost everyday in the investing world, you will hear the terms "bull" and "bear" to describe market conditions. As common as these terms are, however, defining and understanding what they mean is not so easy. Because the direction of the market is a major force affecting your portfolio, it's important you know exactly what the terms bull and bear market actually signify, how they are characterized and how each affects you.

What Are Bear and Bull Markets?Used to describe how stock markets are doing in general - that is, whether they are appreciating or depreciating in value - these two terms are constantly buzzing around the investing world. At the same time, since the market is determined by investors' attitudes, these terms also denote how investors feel about the market and the ensuing trend.Simply put, a bull market refers to a market that is on the rise. It is typified by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long term. Typically, the country's economy is strong and employment levels are high. 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, which, in turn, perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.Where Did the Terms Come From?Well, the origins of these two terms are unclear, but here are two of the most common explanations:
1. The bear and bull markets are named after the way in which each animal attacks its victims. It is characteristic of the bull to drive its horns up into the air, while a bear, on the other hand, like the market that is named after it, will swipe its paws downwards upon its unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents when it was popular to put bulls and bears into the arena for a fight match.
2. Historically, the middlemen who were involved in the sale of bearskins would sell skins that they had not yet received, and, as such, these middlemen were the first short sellers. After promising their customers to deliver the paid-for bearskins, these middlemen would hope that the near-future purchase price of the skins from the trappers would decrease from the current market price. If the decrease occurred, the middlemen would make a personal profit from the spread between the price for which they had sold the skins and the price at which they later bought the skins from the trappers. These middlemen became known as bears, short for "bearskin jobbers", and the term stuck for describing a person who expects or hopes for a decrease in the market.
Characteristics of a Bull and Bear MarketAlthough we know that a bull or bear market condition is marked by the direction of stock prices, there are some accompanying characteristics of the bull and bear markets that investors should be aware of. The following list describes some of the factors that generally are affected by the current market type, but do keep in mind that these are not steadfast or absolute rules for typifying either bull or bear markets:
Supply and demand for securities - In a bull market, we see strong demand and weak supply for securities. In other words, many investors are be wishing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available equity. In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply, and, as a result, share prices drop.
Investor psychology - Since the market's behavior is impacted and determined by how individuals perceive that behavior, investor psychology and sentiment are fundamental to whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, most everyone is interested in the market, willingly participating in hopes of obtaining a profit. During a bear market, on the other hand, market sentiment is negative as investors are beginning to move their money out of equities and waiting in fixed-income securities until there is a positive move. In sum, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market - which, in turn, causes the decline in the stock market.
Change in economic activity - Since the businesses whose stocks are trading on the exchanges are the participants of the greater economy, the stock market and the economy are strongly connected. A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market valuates stocks. In a bull market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.