Psychology of Bull and Bear Markets
There are two types of psychology in the market during a certain phase that investors or traders go through. These psychologies allow many new investors to become a part of the stock market and also remove the weak hands from the share market.
Positive Psychology or Bull Market
In the phase of Positive Psychology or Bull Market, only 1% of the world are believers or behave like one. In the Indian Share Market, when you open a Demat account with a broker or an exchange, you receive a mail from SEBI stating that only 10% of people in the stock market earn money while 90% loose, which I think is incorrect. According to national data, only 1% of investors/traders earn money from the market, and 99% loose. This is due to negativity and a lack of conviction.
According to world data, 99% of people carry a negative psychology, meaning they always worry about things they feel are dangerous or risky. This is why 99% of people are not rich or satisfied with their position. This negative sentiment leads to poor decision-making or risk-averse behavior to protect themselves from perceived future events.
Negativity is directly connected to research. If you’re working on something and make decisions without sufficient research, it leads to negativity. If you’ve researched enough about the topic, your decisions will be filled with high conviction, helping you understand the likely outcome and make the right decisions. By following this process, there is no chance of being negative. Unfortunately, 99% of the world operates this way, and only 1% of people follow the system.
Also Read: How a Company is Formed in India (2024): An Ultimate Success Guide
Negative Psychology or Bear Market
This negative psychology is termed as a Bear Market in the stock market. It is proven that we have a pattern of reactions that apply everywhere in our life. If we make decisions driven by greed or fear, we follow this pattern in the stock market as well. This is why 99% of people lose money in the stock market and only 1% can earn.
Psychology in the Stock Market
Price discovery in the stock market is an outcome of the genetic processes of human beings. This mechanism creates a particular psychology, either positive or negative. This psychology translates into the stock market, recognized as a bull or bear market.
Definition of Bull and Bear in the Stock Market:
- Bull: A bull is a person with a very positive psychology about the economy, businesses, and personal life, and always buys an underlying asset irrespective of any circumstances, including a World War. During the Covid-19 Crash, stock markets worldwide crashed, but bulls took advantage by seeing shares as available at a discount.
- Bear: A bear is a common psychology found among 90% of people. A bear is a person who sees things with a negative outlook about the economy, businesses, and personal life. Bears always remain sellers in the market, irrespective of any circumstances, including a continued Bull Run.
Phases of Bull Market
- First Phase/Primary:
- In this phase of the bull market, there are few buyers with very low optimism, and assets are available at bargain prices.
- Secondary Phase/Mid Phase:
- In the second phase, there are a large number of buyers with high optimism, and assets are available at fair prices.
- Final Stage:
- In the final phase, the market is full of herd behavior, with all participants being buyers with very high optimism, and assets are overpriced.
After completing all the phases, a big bear market takes place where the bulls (only 1%) invest.
Indian Share Market Context
As of 2024-25, India is currently in the second phase, and there is no doubt about reaching the Final Stage in the coming years as India is growing rapidly. According to recent data, India has only 6,000 companies listed in the stock market compared to the USA, which has more than 500,000 companies listed. In India, the penetration of investors in the stock market is only 15%, whereas the USA has more than 65%.
However, in 2024, the daily trading volume of the Indian Stock Market is more than that of the United States markets. This proves that India has just started and has massive potential because the Indian economy is moving towards $20 trillion. In my opinion, this is the best time to invest in India, as no other market in the world is as progressive as India.
Conclusion
Understanding the psychology behind bull and bear markets is essential for making informed investment decisions. While the majority of market participants operate with a negative mindset, those who adopt a positive outlook and conduct thorough research are more likely to succeed. As India continues to grow economically, it presents a prime opportunity for investors willing to embrace a positive market psychology.
Invest Wisely
Considering the insights on market psychology and the current phase of the Indian stock market, investors can make strategic decisions to maximise their returns. The key lies in maintaining a positive outlook, conducting thorough research, and capitalising on market opportunities with conviction.
FAQ
How can investors develop a positive market psychology?
Investors can develop a positive market psychology by conducting thorough research, staying informed about market trends, setting clear investment goals, and maintaining a long-term perspective. Learning from successful investors and avoiding emotional decision-making can also help cultivate a positive outlook.
What strategies can be used to invest successfully in a bull market?
In a bull market, investors can use strategies such as buying undervalued stocks early, diversifying their portfolio to mitigate risk, and staying invested to benefit from long-term gains. It’s also beneficial to monitor market trends and adjust investments as necessary.
What should investors do during a bear market?
During a bear market, investors should focus on preserving capital by diversifying their investments, considering defensive stocks or bonds, and avoiding panic selling. It’s also important to look for buying opportunities when prices are low and to stay informed about economic indicators and market conditions.
How do external events impact investor psychology?
External events such as economic news, political developments, and global crises can significantly impact investor psychology. Positive news can boost confidence and drive market gains, while negative events can lead to fear and market sell-offs. Understanding these influences can help investors navigate market volatility.
What role does emotional intelligence play in investing?
Emotional intelligence plays a crucial role in investing by helping investors manage their emotions, make rational decisions, and avoid impulsive actions driven by fear or greed. High emotional intelligence allows investors to stay calm during market fluctuations and stick to their investment strategies.
How can new investors avoid common mistakes in the stock market?
New investors can avoid common mistakes by educating themselves about market principles, starting with small investments, diversifying their portfolio, and avoiding the temptation to chase trends. Seeking advice from financial advisors and using simulation tools to practice trading can also be beneficial.
What are the benefits of having a diversified portfolio?
A diversified portfolio helps reduce risk by spreading investments across various asset classes, industries, and geographic regions. This approach can protect investors from significant losses if one sector performs poorly and provides more stable returns over time.
How does market sentiment influence stock prices?
Market sentiment, which reflects the overall attitude of investors towards a particular market or stock, can heavily influence stock prices. Positive sentiment can drive prices up as investors buy in anticipation of future gains, while negative sentiment can lead to price drops as investors sell off their holdings.