Betwixt Hope and Fear – A Bull or a Bear?
This abridged form of an old saying talks about bulls and bears in a stock market, and pretty much sums up the sentiments associated with the two phases. The terms “bulls and bears” has gained currency in the recent times, and has moved beyond the hallowed ivory towers of stock trading.
A market trend is the tendency of a market to move in a particular direction – upwards, downwards or sideways – over a defined period of time. If the time period is small, it is known as a secondary trend. When the time frame is medium (one year to five years), the market trend is called primary trend, whereas a trend lasting for much longer periods, five years to 20-25 years, is called a secular market trend. Any of these trends – secular, primary or secondary can be
- downward – called bear market, or
- upward – called bull market.
Thus, a bear market describes a downward market trend, whereas a bull market describes an upward market trend. These terms are now overwhelmingly used in the sense of stock markets, though it can apply to any other market as well. The terms bull market or bear markets can be used to describe the overall market, or even sections or sectors of the market – for example, the market is bullish on technology stocks. Interestingly, they can also co-exist, for example, the market is bullish on technology stocks and bearish on pharma stocks.
Bulls and Bears – Origin of Terms
While anyone with even a nodding acquaintance of stock market knows what a bull market or a bear market is, the etymological origins of the words are not very clear. However, some of the most popular theories are -
- The terms are derived from how these animals attack – while a bull will toss its victim up using its mighty horns, the bear will pin down its prey to the ground using its strong paws.
- Two old and well respected families involved in merchant banking – Barings ( for Bears – do you remember Nick Leeson?) and Bulstrodes (for Bulls) lent their names to these practices.
- The way these animals are used in blood sports such as bull-baiting and bear-baiting (which resemble stock market operations in many respects – or so some bright sparks believe!)
The most credible source for the origin of the terms may be the old profession of ‘bear skin jobbers’, who were involved in selling bear skins they did not even own, in the expectation that they will be able to buy it cheaply in the hunting season from the trappers. This started the practice of short selling – selling at a high price in the expectation that they can purchase in at a lower price in future– one of the primary characteristics of a bear market and bearish operators. The word ‘bear skin jobbers’ later shortened to ‘bears’. Since bulls were also being used in bull baiting at that time, and were considered opposite in nature to bears, both these terms were adopted by the financial operatives of that time (18th century).
Bulls and Bears – Main Characteristics
In terms of the stock market, a person observing the market over the last few years will have the experience of both the bull market and the bear market. The golden period of the economy from 2000-2007 was a great example of a bull phase, when the economy was growing, the stock market indices were climbing (and climbing), property prices were increasing, the job market was expanding, and the mood all around was, well, bullish!
If anyone bought stocks during this period, in the hope of selling them later (the prices were climbing all the time) at a higher price – that person can safely be called a bull or bull operator (Harshad Mehta was reputed to be a bull). A bull market has an optimistic outlook, that is, the prices are expected to increase in the future. Obviously, this cannot last forever, and then the bears take over.
The bears, or bearish operators, have a pessimistic outlook of the market. They expect that the prices will fall down, at least for some considerable time period. Does this mean that they will suffer losses? No, the bears have devised an ingenious device called ‘short selling’, which they use to great effect for earning profits in a falling market. It basically involves selling (without actually owning) at a higher price in hope that the prices will drop, and then the delivery will be made by purchasing at a lower price. The difference is the profit for the bear.
There is another method that the bear may use – waiting till the very end, when the market almost reaches the bottom. Then, they will purchase stocks to dispose later in a bull run.
Wait, There are More Animals in The Stock Market
For some reason, the stock market loves animals! So, in addition to bears and bulls, there are chickens and pigs too! While accomplished market players are either bulls or bears, most of the aam janta lot falls in the latter two categories. Chickens are those investors who are full of undue fear to step into the market – they are always afraid that they will lose money. Their fear prevents them from taking any decisions, and since returns are always tied to risks, they have to contend with rock bottom returns. On the other hand, pigs are a greedy lot, and their greed turns into irrational exuberance, which makes them overlook the obvious risks. To make matters worse, they are not fully aware of the ins and outs of the markets, and have insufficient knowledge to back their investments. Most often, they suffer heavy losses in the markets.
It should be noted that both bulls and bears make money, while chickens are waylaid and the pigs get slaughtered!