Wall Street is full of terms and slang that may sound like gibberish to the layperson: "piker," "buying size," "junked up," "bullish" and "treat me subject." Of all the words and phrases, though, the most recognizable are "bull" and "bear," which refer to the condition of the stock market at a given time.
When all looks right in the financial world – stock prices are rising, unemployment is low or falling and investors are buying – it's a bull market. Investors are generally positive about the way business is going, and they're looking to add to their portfolio.
Keep in mind that a bull market describes how the market fares during the long-term – the market can dip and rise from day to day or week to week, but it's usually classified over a couple of years.
On the flip side, when unemployment is on the rise and stock prices continue to dip, it's a bear market. Investors are trying to unload shares while the price is still good and they've made a profit, but they're doing what they can to stay afloat during a turbulent time.
Often, a recession or depression indicates a bear market. You'll likely see lots of layoffs at big companies and a generally pessimistic view of business.
Why Do We Call Them That?
There isn't one clear answer as to why Wall Street dubbed a rising market as "bull" and a declining market as "bear." The terms have been used for centuries. Over the years, several theories have emerged.
According to one explanation, the animals used to describe the different market conditions attack foes in a particular manner. The bull, for instance, leans his head down, or forward, and then uses his horns to attack upward, hence "bull market." In contrast, the bear stands above its prey and swipes downward with their big paws, which is why it's called a "bear market."
In 16th-century Europe, another theory goes, the proverb "sell the bearskin before one has caught the bear" refers to a "bearskin jobber." This person would sell a bearskin before the seller had the skin in his possession. The hope was that the market price of the bearskin would decrease before the seller acquired it from the trapper, thereby ensuring a profit. Bearskin jobbers were the original short sellers – they thrived in a failing, or bear, market.
Another theory is that the terms originated at the London Stock Exchange in the 17th century. Traders posted notes on a bulletin board with offers to buy stock, so when the market was good and there were plenty of offers to buy, the bulletin was filled with "bulls." Naturally, when the market was slow, the bulletin board was bare, or "bear."
How to Recognize a Bull or Bear Market
It seems easy enough to determine whether market conditions are bullish or bearish, but there's more to it than simply noting whether stocks are rising or falling. You can study the economy to help you predict which way the market will shift, but it's not an exact science.
Typically, markets are stamped with a bull or bear moniker after the fact. Even that, though, can help you figure out which way the market should swing the following year.
What to Do During a Bull Market
If you're an active trader, it's important to have a plan with your investment account. The obvious answer here is to monitor the news and watch how your own stocks in your portfolio are doing. If you have the opportunity to buy a stock or security when it's low, at the beginning of a bull market, you could make a lot of money on that long position. When the stock reaches what you believe is its peak, you sell and reap the profits.
For example, suppose you buy XYZ stock at $12 per share and hold onto it as it rises. You need to choose a peak position and stick to it (always follow your rules and don't become an investor who throws investment strategy out the window). Once it hits the mark, say, $32 per share, you sell – and you make a profit of $20 per share.
What to Do During a Bear Market
Don't let the pessimism get to you – you can still make money during a bear market. Remember bearskin jobbers? Tap into your inner bearskin jobber and consider short selling. This is a process in which you sell shares you don't own, in hopes that the price falls.
Once again, keep your eye on the news. You want to find a company that isn't doing great and research it thoroughly. It's also important to take some time to outline your strategy. Identify your stop loss level. (This is an order you place with your broker that specifies a set price at which the stock should be sold.) Also, choose a position size that is doable; in other words, you will not be financially devastated in the event the stock performs contrary to your plan.
Once you've done these things, contact your broker so you can "borrow" the stock you want. (You will need to already have or establish a margin account with your broker.) Next, you sell those shares and then wait for the market to fall. Once it does, you would buy them back at the lower price, and then return the shares to your broker, less any interest due.
For example, suppose you borrow XYZ stock and agree to return it in 30 days. You sell the stock for $30 per share, and then wait. The stock price drops lower and lower (remember to follow the rules you set for yourself and don't wait longer than you said you would) until it hits your bottom price of, say, $10 per share. Then you buy back the same number of stocks, return them to the lender and pocket the profit minus whatever interest (or other fees) you owe the broker.
There are a lot of variables with short selling. There is upside, but it is also incredibly risky. It requires a lot of research, detailed planning and a sound strategy. If you're new to investing, have limited funds or a low tolerance to risk, you may want to consider other investment vehicles in a bear market.