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Bull and Bear Markets

What do people mean when they describe markets as bullish or bearish? What are bulls and bears? Sidestepping obvious zoological answers to the question, pretty much everyone knows that a bull is an investor who drives the prices of stocks up and a bear is an investor who drives the price of stocks down. This actually hinges entirely on what the investor believes, or wants to believe at any rate.

If an investor believes that the value of a company is greater than the price the market sets for it, then he expects the stock price to rise. Anticipating this rise, he buys the stock at a price slightly higher than the average market price at the moment of sale, confident that the stock price will rise still higher. However, by purchasing the stock at a slightly higher price than average, he has actually raised the average price of the stock, though perhaps only a bit. Thus he fulfills his own belief, through action: the stock price rose, because he acted on his belief that it would. Of course, only a very large investor can single-handedly effect the movement of a stock price. However, when the mass psychology of Market Opinion holds decisively that a stock is undervalued, then the over-all drive to buy the stock out-balances the over-all drive to sell, and the price of the stock climbs in earnest. The market is bullish. Sellers can ask higher and higher prices for the stock they own, and be confident that someone new will always step forward to buy from them. The new beginning of a bull market is the best time to buy, and the full swing of a bull market is the best time to sell.

Now if an investor believes that the value of a company is less than the price the market sets for it, he expects people will catch on to this, and that the stock's price will drop. Anticipating this drop, he sells the stock he owns for slightly less than the average market price, eager to reap gains before his investment loses value. But he has lowered the average price of the stock by selling the stock at a slightly lower price than average. When enough investors begin selling their stock holdings off at lower-than-average prices, the mass psychology of Market Opinion swings in favor of the bearish view, that the company is overvalued in the markets and must fall. The over-all market drive to sell then out-balances the over-all market drive to buy and prices plummet in earnest. This is a bear market. Buyers may bid lower and lower prices for stock, confident that a desperate new seller will step forward and offer them what they want. The new beginning of a bear market is the best time sell, and the full flourish of a bear market is the best time to buy.

Belief in the the orientation between the market price of a company and the "real" value of the company is the origin the rise and fall of stock prices. One invests in an idea ("XYZ will rise!") as much as one believes, and if there is enough belief among the estimated ------- million investors in the country that a stock will rise, then rise it will. The thin line that charts the movement of stock prices is the record of a great battle of wills, where bulls and bears throw huge amounts of money behind their beliefs that the markets will rise or fall. Every investment, sale or purchase, is a blow struck against the other side. Bulls strike up with their horns, bears strike down with their claws, and the winners take the prize: the other man's money.


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