What Is a Bull Market and How Does It Work?
A bull market is a situation in which prices are rising or are expected to rise in a financial market. The word “bull market” is most commonly associated with the stock market, although it can also refer to any tradable asset, including bonds, real estate, currencies, and commodities.
Because security prices increase and fall almost continually throughout trading, the phrase “bull market” is usually reserved for extended periods during which a significant share of security prices is rising. Bull markets can endure months, if not years, at a time.
Bull Markets: An Overview
Bull markets are characterized by high levels of optimism, investor confidence, and hopes that great performance will continue for a long time. It’s tough to foresee when market trends will shift constantly. Part of the problem is that psychological factors and speculation can sometimes have a significant impact on the markets. There is no single statistic that can be utilized to identify a bull. Nonetheless, the most frequent definition of a bull market is a period in which stock prices climb by 20% after a 20% dip and before another 20% decrease. Because bull markets are difficult to foresee, analysts usually only notice them after they have occurred.
A Bull Market’s Characteristics
Bull markets often occur when the economy is either strengthening or already robust. They are more likely to occur in the context of a strong gross domestic product (GDP) and a decrease in unemployment, as well as a rise in corporate profits. During a bull, investor confidence will also tend to rise. The total demand for stocks, as well as the overall tone of the market, will be bullish. Moreover, during bull markets, there will be a general increase in the number of IPOs.
Notably, some of the aforementioned criteria are easier to quantify than others. While business profits and unemployment may be measured, determining the general tone of market comments, for example, can be challenging. The supply and demand for securities will swing back and forth, with supply being weak and demand is robust. Few investors will be willing to sell stocks, while many will be eager to acquire. Investors are more inclined to participate in the (stock) market during a bull to profit.
Markets: Bull and Bear
A bear market is the polar opposite of a bull market, marked by falling prices and generally enveloped in pessimism. According to popular opinion, the use of the names “bull” and “bear” to describe markets stems from the way the animals battle their opponents. The horns of a bull are thrust into the air, while the paws of a bear are swiped downward. These behaviors serve as metaphors for market movement. It’s a bull if the trend is upward. It’s a bear market if the trend is down.
The economic cycle, which includes four phases: expansion, peak, contraction, and trough, often coincides with bull and bear markets. The start of a bull market is frequently a precursor to economic expansion. Because stock values are driven by public perceptions of future economic conditions, the market frequently increases before broader economic indicators, such as GDP growth, begin to climb. Similarly, bear markets frequently emerge before the economic decline. A typical U.S. recession begins with a plummeting stock market several months before GDP declines.
How to Benefit from a Bull Market
Investors who wish to profit from a bull market should buy early to capitalize on growing prices and sell when the market reaches its top. Although it is difficult to predict when the bottom and peak will occur, most losses will be minor and transitory. We’ll look at a few of the most popular market techniques in the sections below. However, because it is difficult to gauge the current status of the market, these tactics all include some risk.
1. Purchase and Hold
The technique of purchasing securities and holding them to eventually sell them is one of the most basic strategies in investing. This technique necessitates the investor’s confidence: why stay on to security unless you expect its price to rise? As a result, the optimism associated with bull markets serves to drive the buy-and-hold strategy.
2. Increased Buy and Hold positions
Increased purchase and hold is a riskier variant of the classic buy and holds strategy. The increased purchase and hold strategy is based on the idea that an investor would continue to add to his or her holdings in given security as long as its price rises. For every increase in the stock price of a predetermined amount, one frequent strategy for growing ownership indicates that an investor will buy an extra predetermined quantity of shares.
3. Additions to the Retracement
A retracement is a brief period during which the price of security reverses its general trend. Even in a bull market, stock prices are unlikely to continue to rise indefinitely. Rather, even while the broad trend goes upward, there are likely to be shorter periods when tiny declines occur. During retracements in a bull market, some investors look for opportunities to buy. This approach is based on the assumption that assuming the bull market continues, the price of the security in issue will quickly rise, providing the investor with a discounted purchase price retroactively.
4. Trading in full swing
The strategy known as full swing trading is perhaps the most aggressive manner of seeking to profit from a bull market. Short-selling and other strategies will be used by investors who use this strategy to try to squeeze out maximum gains as shifts occur within the context of a bigger bull market.