What Is a Bull Market and How Can Investors Benefit From One
Cierra Murry is an expert in banking, credit cards, investing, loans, mortgages, and real estate. She is a banking consultant, loan signing agent, and arbitrator with more than 15 years of experience in financial analysis, underwriting, loan documentation, loan review, banking compliance, and credit risk management.
A bull market is a condition of a financial market in which prices are rising or are expected to rise. The term "bull market" is often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities.
Because securities rise and fall continuously during trading, "bull market" is typically reserved for extended periods in which a large portion of security prices are rising. Bull markets can last for months or even years.
Key Takeaways:
– A bull market is a period of time in financial markets when the price of an asset or security rises continuously.
– The commonly accepted definition of a bull market is when stock prices rise by 20%.
– Traders employ various strategies to profit off bull markets.
– The opposite of a bull market is a bear market, when prices trend downward.
Bull markets are characterized by optimism, investor confidence, and expectations that strong results will continue for an extended period. It is difficult to consistently predict when market trends might change. Part of the difficulty is that psychological effects and speculation may play a large role in the markets.
There is no specific and universal metric used to identify a bull market. Nonetheless, the most common definition is when stock prices rise by 20% or more from recent lows.
Since bull markets are difficult to predict, analysts can typically only recognize them after they have happened. A notable bull market in recent history was the period between 2003 and 2007. During this time, the S&P 500 increased significantly after a previous decline, but major declines occurred again after the 2008 financial crisis.
Bull markets generally take place when the economy is strengthening or already strong. They tend to happen in line with strong GDP and a drop in unemployment and often coincide with a rise in corporate profits. Investor confidence also tends to climb throughout a bull market period. Additionally, there will be a general increase in IPO activity during bull markets.
Some factors are more easily quantifiable than others. While corporate profits and unemployment are quantifiable, the general tone of market commentary can be more difficult to gauge. Supply and demand for securities will seesaw: supply will be weak while demand will be strong. Investors will be eager to buy securities, while few will be willing to sell. In a bull market, investors are more willing to participate in the market to gain profits.
Characteristics of bull markets include an increase in trading volume as more investors are willing to hold onto securities for capital gains. Securities in a bull market receive higher valuations as investors are willing to pay more for them due to the perceived potential for price appreciation.
A bull market is often characterized by greater market liquidity with more demand and fewer sellers, making it easier for investors to buy and sell quickly. Companies that perform well in a bull market may increase dividends, which can be attractive for income-focused investors. There may also be an increase in the number of IPOs during a bull market, providing investors with opportunities to participate in the growth of new companies.
The opposite of a bull market is a bear market, which is characterized by falling prices and pessimism. The terms "bull" and "bear" come from the way these animals attack their opponents, with bulls thrusting their horns up and bears swiping their paws downward.
Investors can take advantage of a bull market by buying early and selling at the peak. Strategies used during bull markets include buy and hold, increased buy and hold, retracement additions, and full swing trading.
Examples of historic bull markets include the Roaring Twenties, the Japanese bull market of the 1980s, the Reagan bull market of the 1980s, the 1990s bull market, and the 2009 bull market.
Bull markets often coincide with a strong and growing economy. Stock prices are driven by expectations of profits and the ability of firms to generate cash flows. A strong production economy, high employment, rising GDP, low interest rates, and low corporate tax rates all contribute to rising stock prices.
Bull markets can falter and become bear markets during rough economic patches, such as recessions or spikes in unemployment. Negative investor and consumer sentiment may lead to a focus on reducing risk rather than taking risks.
In conclusion, a bull market is a financial market characterized by rising prices and investor optimism. It can apply to various markets, including stocks, bonds, real estate, currencies, and commodities. Bull markets indicate periods of economic strength and are characterized by increased demand for securities, rising corporate profits, and declining unemployment. The opposite of a bull market is a bear market.
