10 December, 2012

Battle of Bulls and Bears

by Charumati Haran


Statues of the bull and the bear in front of the Frankfurt Stock Exchange
Courtesy Wikimedia Commons
“Bulls, not bears, go into hibernation" - UK Reuters
“Wall Street Week Ahead: Torn between bulls and bears” - US Reuters
“Apple mauled by bears again” - CNN Money
If you follow the news in the financial world, you might have come across the terms “bull” and “bear.” If you have ever wondered what they mean, here’s an explanation.
Before we try to understand these terms, we must first know what is meant by “trends” in the stock market. People invest in the stock market to increase their earnings. There are two primary methods of earning in the stock market. First, buy shares at a low price and sell them at a high price. Second, receive part of the company’s profits due to being a shareholder.

There are a number of reasons for the fluctuation of stock prices. The keywords here are “investor sentiment” and “investor confidence.” If people feel that a particular company will not do well in the future, they will try to sell its stocks and avoid purchasing them. This increases supply of that stock in the market and causes prices of the stock to drop. On the other hand, if people feel that a company is sure to do well in the future, they will be more eager to buy its shares at higher prices. Due to the increase in demand for the shares of that company, the price of the shares also goes up.

 Various things can affect investor sentiment. If investors feel that there are too many problems in a particular industry, they would probably shift their money to another, more profitable industry.

  • Industrial growth can face obstacles from restrictive government policies, such as high taxes, licensing, restrictions on FDI, etc.
  • Other things that affect investor sentiment are political instability, the expectation of war and currency depreciation and appreciation.

  • In addition, if people expect demand for a commodity or service to increase they will buy more shares of a company in that industry because they expect to increase their profits by doing so and vice versa.

  • Events like scandals (in companies or the stock market) lower investor sentiments and thus, share prices e.g. Satyam scandal.
  • On the other hand, if a particular company acquires a valuable natural resource, investor sentiment would rise and so would the company’s share prices e.g. acquiring of natural gas by Reliance

The stock market is said to move in either an upward (positive) or downward (negative direction. These trends are usually observed in stock market indexes like SENSEX or NASDAQ. A stock market is often used as a measure for the health of an economy. When demand for shares of companies is high, it reflects a high level of investment in companies, which leads to a high level of production that eventually leads to a high level of employment and earnings. Finally, depending on whether people prefer saving or spending, it could also increase savings. On the other hand, if the stock market index has a downward trend, most stock prices would be falling. If the demand for stocks of companies are falling, this implies less investment, less production, less employment and earning and finally, reduced savings. All of these affect the GDP of the country.

The terms “bull” and “bear” refer to the sentiments of particular investors, of a section of investors or of all the investors, i.e., the market. We consider bulls to be energetic and fast, while bears are considered slow and cautious. Thus, a bull market is one where stock prices are going up rapidly. A bear market is one where stock prices are falling or crashing rapidly. If a person is pessimistic and expects prices to fall, he is said to be a bear. On the other hand, if a person is optimistic that stock prices will go up, he is a called a bull. Generally, one finds that a bull takes more risks in the market than a bear. If there are many bullish or bearish days in a row, it may be called a bull market run or a bear market run. The bull and bear market may even appear in cycles. These market conditions will affect how much profit is made by an individual investor. Bears and bulls are also associated with investment strategies. The bear is associated with the practice of short selling - it means you borrow a stock, sell it and buy it back when prices fall, thus obtaining a profit. Conversely, a bull is associated with long selling - buying a share, waiting for the price to rise and then selling it to make a profit.

There are a number of theories as to why a bull and a bear in particular are used, though there is no definite reason. The most widely known and accepted theory is that bulls use their horns to swipe upwards aggressively, while bears use their paws to swat things downward. The first usage of the term was in the book Every Man His Own Broker (1775) by Thomas Mortimer.

When it is said that bulls and bears are battling in the market, it refers to fluctuations in the market trends. A number of websites and books explain methods to recognize and profit from these trends.

Various other animals are also used to characterize sentiments: chickens, pigs, stags, mice and wolves. However they are not used as often as bulls and bears.

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