You have heard this phrase so many times.
“Harshad Mehta was the big bull.”
“Who is the big bull of Nepal?”
“The market is bullish now.”
“The bear trend has ended.”
“Bulls make money. Bears make money. Pigs get slaughtered.”
What does it actually mean?
Explanation
I guess you know by now that a bull trend is a common name to signify a rising market. Meanwhile, a bear trend is when the overall market is falling, caused by a decline in the stock price of most companies listed in that particular stock exchange.
The query is not about that. The query is about why is an uptrend called a bullish trend and a downtrend called a bearish trend?
Let’s turn on the National Geographic Channel
The investment community worldwide has made the words “bull” and “bear” their own. Investing is a battle between investors who think the price will rise and those who think it will fall. To understand why they chose these words, we will have to study the behavior of bulls and bears.
Investors love to believe what they do is done with strength and aggression. Bulls and bears are two fierce, aggressive animals in the animal kingdom. There is no comparison of the brevity and the strength of a bull. A bull’s primary strength comes from the power of the blow of its horns. When a bull hits with its horns, it likes to toss its target in the air. Instead of just attacking straight, it uses its masculine horns to lift its enemy from the ground.
This is just like the investors trying their best to drive the price upwards. When enough investors come together and buy a stock, its price goes higher, as if it is hit by a raging bull.
The bear is another fierce creature in the wild. A bear in its natural habitat may seem lazy and slow. But do not underestimate its brute force. A bear does not lift its enemy in the air as a bull does. It rather uses its strong claws to pounce on its enemy and bring it to the ground. Bears use their claws as weapons when getting in fights with other bears or lashing back at other creatures that they may perceive as a personal threat. The sharp claws are powered by enormous paws and great strength. The power a bear brings to its claws can shred human skin, as well as cutting deep into muscles.
This is just like the investors who drive the price downwards by selling stocks in bulk. While an enormous number of investors sell the stock, the excess supply causes the price to go down, as if it is being brought to the ground by a giant grizzly bear.
What does it mean to say that you are bullish or bearish?
This is a common phrase among the investor community. People always like to have an opinion about the market. Some will say that they are bullish about the current scenario. With this, what they really mean is that they think the overall market will go up, caused by rising stock prices. In this case, the investor may enter positions and add to his portfolio.
Meanwhile, when an investor is bearish about the market, he thinks the market will fall as a result of a decline in stock prices. In this case, the investor may exit his positions, empty his portfolio, and wait for the appearance of another bullish signal. Interestingly, investors can gain even when the stock market is falling. This way of profiting from a decline in stock prices is called stock shorting. My good friend Sriyans Rauniyar has explained it the best in his article:
Certain traders in the stock market earn big by betting against a stock. This process is known as shorting. Consider that you borrow an apple betting that the apple’s value will decrease by the end of the day. You go to an apple vendor, promise him interest, and borrow 10 apples from him at the beginning of your day. You immediately sell them to someone else at the current market price of Rs. 10 each and earn a total of Rs. 100. Yes, it is really that strange. You can sell those apples without actually buying them first. You have only borrowed those apples.
At the end of the day, say the value of an apple drops down to Rs. 5 each. You then purchase 10 apples at the current value of Rs. 5 and pay Rs. 50. You then go on to return those apples to the vendor. How much money do you have left? Rs. 50, right?
The vendor got his 10 apples back. And you made money by selling them at a higher price and returning the apples to the vendor by buying at a cheaper price. Are you with me? This process of betting against a stock is known as shorting.
Wrapping Up
Now you know why an uptrend is called a bull trend and a downtrend is called a bear trend. You also know what it means to be bullish and bearish about the market.
I want to conclude this article with an explanation of a quote I mentioned above:
“Bulls make money. Bears make money. Pigs get slaughtered.”
Bulls make money by buying when the market is bullish. Bears prevent losses by selling when the market seems bearish. In matured stock markets, you can also earn by bearish sentiment if you can short stocks. Meanwhile, stock shorting isn’t currently allowed in NEPSE.
An investor can be both bullish or bearish depending on conditions. However, there is another group of investors that invests without any research and belief. These investors invest on rumors and stock “tips” from a “friend.” While both bulls and bears make money, this class of investors ends up losing money in the long run after a few lucky instances.
You can’t be lucky every time. The investment community likes to call such investors pigs. They ultimately lose it all in the game.
