Defining a Bull Market
A bull market is used to encapsulate a condition wherein a financial market bears witness to prices on the rise or which are anticipated to rise. Most often, this term is used with reference to the stock market, however, it can be used with reference to any security that is traded. For instance, bonds, currencies, commodities and real estate can each have the term “bull market” applied to them.
Owing to the fact that the price of these securities are in a continuous state of rising and falling while trading takes place, the term bull market is ordinarily applied to extended periods during which a significant portion of a given type of security’s prices are in a state of rising. Therefore, bull markets can be in existence for months if not years.
Understanding What a Bull Market Entails
Bull markets are identifiable by the air of optimism that prevails wherein investors are confident in their investments and there exists a belief that strong results should prevail for an extended time frame. Accurately predicting when the trends that dominate the market might change isn’t easy to do consistently. What adds to this dilemma is the fact that psychological effects and speculation can impact markets in a major way.
While there is no universal outline which stipulates what a bull market can be identified with, ordinarily a bull market is identifiable and defined in scenarios wherein stock prices rise by 20 percent. This rise ordinarily takes place following a drop of 20 percent and is followed by a second decline by 20 percent.
Owing to the fact that it is hard to predict bull markets, analysts typically declare a bull market only once this phenomenon has taken place.
Showcasing What Characterizes a Bull Market
The following features characterize a bull market.
- A bull market is characterized by a strengthening if not already strong economy.
- They ordinarily tend to occur in concurrence to situations of a strong gross domestic product (or GDP) and dipping rates of unemployment.
- More often than not, a bull market will be present at the time during which corporate profits witness a rise.
- Investor confidence as a result tends to be on the rise as well during the course of a bull market.
- The demand for stocks in their totality will tend to be positive during a bull market in addition to the general tone of the market being positive as well.
- IPO activity is also on the rise during instances of a bull market being activated.
- Securities will witness supply and demand levels being diametrically opposed with the former being weak while the latter being strong.
- Bull markets are characterized by investors who are eager to avail of securities as opposed to selling the same.
- Moreover, these very investors are more amenable to the idea of partaking in the market such that they can acquire profits.
It is important to note while some of these factors are easy to quantify, others aren’t. Take for instance corporate profits and unemployment which can be quantified with ease versus the general tone of a market which can’t be quantified with the same level of ease.
Making the Most of a Bull Market
Investors seeking to profit from a bull market ought to buy early so that they can take advantage of the rise in prices and sell them once they reach their peak level. While it is tough to ascertain when a price will reach its bottom and its peak, most losses during this time are ordinarily minimal and only last a temporary time frame.
Read on to understand the more prominent strategies employed by investors during bull markets. It is important to note that these strategies involve a level of risk owing to the fact that it is hard to assess the state of a market as it presently exists.
Buy and Hold – This strategy operates by buying a given security and holding on to it in order to potentially sell it in the future. Investors are required to have a fair deal of confidence in order to hold onto a security in the hopes that its price will rise. The optimism that is characteristic of bull markets helps fuel this approach.
Increased Buy and Hold – This strategy serves as a variation of the previous strategy mentioned. What makes it differ is the increased amount of risk it stipulates. Under this strategy, investors must continue to add to their holdings in a given security so long as said security’s price continues to move upwards. One way in which investors go about this is by buying an additional quantity of shares which is fixed and which occurs each time the stock price increases by a pre-set amount.
Retracement Additions – Retracement refers to the minimal time frame during which the general trend in the price of a security witnesses a reversal. It is important to note that even while a bull market exists, it’s unlikely for stock prices to only rise. Instead, it is likely for there to exist short time frames during which the prices of these stocks experience small dips as well despite the overall upward trend. Some investors seek to buy during periods where these small term dips take place. The idea based on which this strategy exists is that provided the bull market continues to exist, the price of the security in question will snap out of its dip and begin to rise again, thereby retroactively providing its investors with a discounted price of purchase.
Full Swing Trading – Existing as one of the more aggressive ways of taking advantage of the bull market, investors who make use of full swing trading take on very active roles. They make use of short-selling in addition to other techniques in order to maximize their gains as shifts take place in terms of the larger bull market.
Characterized by optimism and lasting months if not years, bull markets inspire confidence in investors and witness a hike in demand and the price of securities rises.