These two words are always around in the investing world. Overall, the bull and bear market terms denote whether the market moves up or down. At the same time, as the market is shaped up by investors' sentiment, these terms ‘bullish’ and ‘bearish’also denote how investors feel about the market – positive or negative.
What is a bull market?
Simply put, a bear market is when the value of an investment declines over an extended time period. It can be weeks, months or even years.
A bull market occurs when asset prices grow by 20% or more. Such a situation is characterised by the excessive optimism ofinvestors, who become confident that the prices will keep growing further. They may push the asset’s bidding price way above its underlying value. Such sentiment is called ‘irrational exuberance’, which can entail asset bubbles like we witnessed in the real estate market in 2008.
What is a bear market?
A bear market is the opposite of a bull market. It happens when prices fall around 20% or more from their high.
In bearish circumstances, asset prices are continuously in decline, which results in the widespread pessimism of investors. They are sure that this downward trend will keep going, which forces them to sell the asset and, consequently, push the prices down even further. As a result, the downward trend sustains itself.
Typically, the overall economy will slow down in bearish conditions.
Where did the terms come from?
The origin of the ‘bull’ and ‘bear’ terms remains unclear, but there are at least two explanations.
The first one suggests that the words derive from the styles that the animals use to attack their enemies. Bulls thrust their horns up, while bears swipe their claws down. Metaphorically, if the market goes up, it resembles what a bull does while attacking. And if the trend is downward, it simulates a bear’s attack movements.
The other explanation has historical grounds.
You’ve probably heard a proverb ‘to sell the bear's skin before one has caught the bear.’ In relation to the early stock speculators, it transformed into the phrase ‘to sell/buy the bearskin’. Within time, bearskin was shortened to bear, the term was from this time was then associated with the stock which is sold and with the short seller themselves.