You’ve probably heard the terms before on CNBC but, if you’re a new investor, you might not know what they mean. However, Wall Street didn’t pull these terms out of thin air. In fact, they make perfect sense when you put them in context with their history. Bulls and bears have been battling it out on Wall Street for over a hundred years. To understand the stock market, you have to understand that it all comes down to bulls vs bears.
Bullish vs Bearish: Bearish Meaning
The stock market, bears are sellers. They believe assets are going down in prices, so they’re selling the stocks in order to make a profit. Often times bears use shorts in order to generate profits from falling asset prices. Bearish is used to describe a negative perspective on asset prices.
This History of Bearish
Bear has been used to describe a negative outlook on asset prices since the 18th century. The usage originated in the early 1700s around the bearskin trade. In those days, trappers gathered bearskins and sold them to a middleman. The middleman usually had them sold before he even received them, so it was in his best interest if bearskin prices went down. Then, he could afford to buy more bearskins with his cash on hand and generate more profits. These middlemen were commonly referred to as bearskin jobbers and the usage gradually shortened to ‘bears’ over the years. The term stuck to describe a negative outlook on asset prices.
Bullish vs Bearish: Other Bear Terms
Shorting is very similar to the aforementioned bearskin business. First, short-sellers enter an agreement to borrow shares, usually from their broker, for an agreed-upon price. They immediately take those shares and sell them on the open market. Now, they have cash in hand but they still have to repay their broker for the shares they borrowed. If asset prices go down, they can buy back the shares for less then they paid and keep the price difference.
For example, I’m a short-seller and I borrow 10 shares of Stock A for $10 per share. Now I have $100 but I have to return 10 shares of Stock A to my broker. If Stock A goes down to $8 per share, I can buy 10 shares on the open market for $80. Then, I return the 10 shares of Stock A to my broker and I’m left with $20 in profits.
Unfortunately, short-sellers are on the hook for unlimited losses if asset prices go the other way. You can actually lose more money on a short than you put into the trade. Once you short shares, you have to pay your broker back with shares. You can’t say, “nevermind, here’s your money back.” Your broker will only accept shares so – if Google suddenly buys out Stock A and share prices sky-rocket to $100 per share – you’re on the hook for a huge loss. You would have to buy back 10 shares at $100 each for a total of $1,000 dollars. Wham, you just lost $900 on a $100-trade. Only experienced traders should mess around with shorts.
In a bear market, asset prices are heading lower. Short sellers and bears want the market to go down, so things are going their way when the market is declining. Specifically, a bear market occurs when asset prices fall by 20% or more. If you ever hear someone say “bear market territory”, they’re probably referring to the 20% benchmark.
A sell-off happens when a large volume of stocks or other assets are sold within a short period. Major sell-offs significantly push down asset prices. For bears, sell-off is a good thing as they can profit from the resulting price decline of an asset since they take short positions.
What Are Puts?
Put options represent a contract that gives the holder the right to sell a round lot of shares at an agreed-upon price. Usually, put options indicate a bearish perspective on the underlying asset. If share prices go down, put values usually go up. Since it’s an option contract, there is no obligation to actually convert on the contract. Unlike shorts, potential losses can’t exceed the price of your position.
If you buy $10 puts for $1 apiece, you have the option to sell 100 shares for $10 each. If share prices go down to $8, you can convert your option into shares for $800 and sell them for the agreed-upon strike price of $10 each. You would net a $200 profit on this trade.
Alternatively, you could sell your put contracts on the open market and collect the contract premium. If share prices went down to $8, the price of $10 puts might go up to $3 each. Then, you can just sell your put contracts for a total of $300. In this scenario, you paid $100 for the lot, so you’d collect a $200 profit.
Like any other option, put options have an expiration date. They also suffer from time decay, so prices tend to go down as the expiration date draws closer. All options become worthless after their expiration date, so traders need to sell them or convert them beforehand or they’re beat for their profits.
Bullish vs Bearish: Bullish Meaning
Bull eventually evolved to describe the opposite end of the bearish perspective. Bulls believe asset prices will go up and they’re optimistic about the market’s general outlook. Bullish traders buy stocks with the belief that they’ll be worth more in the future. Then, they can sell them for more than they paid in order to generate a profit.
The ‘bear’ term appropriately evolved from an actual historical market phenomenon, but the origins of ‘bull’ are more figurative. This term came around after ‘bear’ came into common usage. Many experts believe that it became popular because the bull was widely regarded as the bull’s arch-nemesis in the 18th century. This perception may have originated from the practice of bull-and-bear fights, a popular blood sport that pitted the two animals against each other in a blood sport.
Bullish vs Bearish: Other Bull Terms
Longs are the bullish equivalent of shorts. They describe traditionally buying an asset and holding it to sell for a profit at a later date. This is the usual approach for beginners and it involves fewer complexities than shorting. Simply buy the stocks you think will go up and sell them for a profit when prices increase. When you buy any type of stock or other assets, you are in a long position. Sometimes, traders will simply say, “Right now I’m long Stock A”, meaning they’re holding shares of Stock A or options that will appreciate in value if Stock A goes up.
In a bull market, the prices of stocks or other assets are increasing and investors are optimistic about the future. Bull markets can last for months, years, or even decades. The stock market is currently in a long-term bull market that began in 2009, over ten years ago. This is an unusual case because it’s the longest-running bull market ever recorded, but it shows that there is no limit to how long a bull market can run.
A short squeeze is a situation whereby a heavily shorted stock, cryptocurrency, or commodity surges higher. This is a bullish situation as it forces the short sellers to close out their positions, leading to further upward pressure for the asset.
Short sellers are squeezed out of positions and in most cases, they lose. A short squeeze usually occurs because of some positive developments that indicate the price of an asset is set to go on a Bull Run.
What Are Calls?
A call option is a financial contract that gives an investor the right to buy a stock, commodity, or any other asset at a set price within a specific time. However, the call option holder has no obligation to purchase the options.
When shares go up above the strike price, the option holders can “call” the shares for a profit. Conversely, they can sell the actual call option to another investor and generate profits on the face value of the call option.
Bullish Vs. Bearish: Closing Thoughts
Bullish vs bearish is the setting for all price movements. The battle between these sides dictates the market. When bears outnumber bulls, share prices go down. When bulls outnumber bears, prices go up. This is the fundamental concept that drives stock market investing. If there were no bulls or bears, asset prices would never change. This difference in perception drives action and makes it possible for speculative investors to profit.
If you’re ready to learn more about trading, you should sign up for Stock Dork Alerts. Our reports can teach you everything you need to know to start making money in stocks. Sign up today and get our 2020 Growth Stock Guide as our thanks for signing up. It’s totally free and there’s no obligation, so sign up and claim your free guide today