What Is Market Behavior?

Market behavior is a broad economic term that refers to the behavior of consumers, businesses, or the stock market. It is often analyzed and used to generate various marketing strategies aimed at boosting sales or brand recognition when dealing with businesses and consumers by analyzing their purchasing behavior. Niche marketing often takes into account the target demographics, the most likely consumer needs addressed by a product, and the most effective advertising stimuli to begin a successful campaign strategy. Understanding stock market behavior is also important for investors looking to predict trends, time the market, or choose the best outlets for their investments.

Consumer behavior is one of the most common focuses of market theory, and it incorporates elements of economics and finance as well as psychology and sociology. Both transactional and relationship marketing play into this theory, and each tries to maximize sales according to different strategies. Relationship marketing capitalizes on market behavior by building brand recognition and long-term relationships with customers, ensuring high percentages of return visits. In contrast, transactional marketing focuses on the individual transactions and takes advantage of consumer behavior with that goal in mind.

There are several models for consumer behavior, the most common of which is the black box model. This model proposes that there are both internal and external factors that influence a consumer’s buying decision. Internal factors include individual traits, such as personal history, lifestyle, attitude, and the decision-making process itself, which includes brand comparisons, searching for data about a product, and behavior after making a purchase. External factors include a consumer’s surrounding environment, such as the current economic conditions or cultural trends, as well as the implemented marketing strategies. These strategies usually include choosing an appropriate price point for a product, optimizing its purpose and design, and creating effective advertising stimuli, sales, or other promotions.

Market behavior can also refer to the behavior of the stock market. Some of the same observations from consumer behavior analysis can be applied to buying and selling behavior within the stock market. For example, many investors are likely to sell their stocks as the market dips and buy when it’s on the rise, and many others will act according to group behavior. Much of this day-to-day fluctuation in the stock market is simply "noise," and the long-term market behavior is quite different. Understanding these trends can help investors better understand the stock market, when to buy and sell, and which investing strategies are best.

To fully utilize the stock market to their advantage, investors, traders, consumers, and businesses need to understand the main market behaviors that regularly occur. They also must recognize that the market is constantly changing and these behaviors occur more cyclically rather than separately from one another, on both a short-term and a long-term basis.

The four main market behaviors are a bull market, bear market, the corrections phase, and the stagnant, or flat market. Bull market behavior is a market that includes significant short-term rises in stocks and overall shows a positive, upward trend in the market as a whole. Bear markets, act in an opposite manner, in that stocks fall sharply and an overall downward market spiral is noted. When the market is transitioning between these two market types, it is known as being in the corrections phase. During this behavioral phase, the market will even out and stabilize by either rising or falling appropriately and ridding the market of both extravagant rises and outrageous falls. Finally, when the market goes through a longer period of more even dips and climbs that effectively cancel each other out, the market is said to be flat or stagnant acting. 

Identifying and predicting these market behaviors can be difficult. Generally, bear and bull markets are characterized by longer periods of significant rises and falls. Most investors and economists only consider a market to be bear or bull if the stocks change by at least 20% from recent activity and if that trend continues for an extended period, often many months or several years. Truly bear and bull markets are less common than the in-between trends of the correctional phase and flat market. Many investors try to anticipate these changes beforehand and some believe that the anticipation and reactions to perceived market trends actually propel the market into that trend. In essence, the market may sometimes be more of a reaction to the actions of investors, traders, consumers, and companies, rather than the other way around. With this in mind, to more accurately identify the market behaviors and changes in those behaviors, a person has to observe, understand, and recognize trends in the factors that create and affect the market instead of simply the market itself.

Many different factors work together to determine the behavior of the market. Some of these factors are more consistent and somewhat predictable and some seem to be completely random and drastic. Various factors stem from different groups of people as well as national or world occurrences. Different factors exist at different levels too, from the more specific, individual company and consumer level to the more general economic, political, and social levels of the entire country and world.

Stocks relate to a particular company and service or product, so what happens within a company or to a service or product often changes the way the related stock behaves. Common examples include changes in ownership or management, updates to products and services, consumer reports and opinions, and a company's political or social leanings. Generally, companies that maintain a more positive image and higher profit margin also have more positive trending stocks and vice versa. 

Qualities of the stocks themselves also drive specific as well as general market behaviors. This mostly has to do with the relationship between supply and demand. Large supply with low demand will often drive the stock prices down as fewer want the stocks and lower prices may encourage traders and investors to purchase them. High supply combined with high demand or low supply with low demand will usually keep the stock at an even level without many rises or falls at all. Low supply with high demand will naturally drive the prices of the stock up significantly as people compete with one another to own it. 

There are also some more overarching, general factors that contribute to the behavior of the stock market. The general state of the economy is one example. Changes in interest rates, oil prices, unemployment percentages, and inflation all affect how certain stocks and the overall market behaves. Political and social periods of upheaval or peace also seem to relate to how the stock market acts as well. Finally national and world disasters, wars, peace treaties, and technological and medical advancements, that change the outlook and behavior of the consumers of that market, often change the overall trend of the market itself. Sometimes these changes can be anticipated and other times they happen without warning, which is why it can be so difficult to predict how the market behaves.