In the trading world, you will most likely hear the term “bull market” used on a daily basis. It describes a market that is currently on the rise. A bull market is when the price of an investment rises over a long period of time. This term is commonly used to describe securities, such as stocks, bonds and commodities. But bull markets can also occur in other investment markets, such as real estate. Since market direction is a major force affecting your portfolio, it is important that you have a full understanding of what this term means. Read on to find out more about bull markets and their impact in the financial markets.
The bull market: definition
A bull market is quite simply a financial market that is currently rising. In other words, it is a financial market in which the prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market. However, it can apply to anything that is traded, such as bonds, currencies, and commodities, and even real estate. The term bull market is therefore generally reserved for prolonged periods in which a large portion of the price of securities increases. Bull markets tend to be long standing and can last for months or even years.
Understanding bull markets
Bull markets are characterised by optimism, investor confidence and the expectation of strong results over sustained periods. It is difficult to predict with consistency when market trends are likely to change. Part of this difficulty actually comes from uncontrollable data. Psychological effects and speculation often play an important role in the markets. There is no specific and universal metric to identify a bull market. As bull markets are difficult to predict, analysts are usually only able to recognise the phenomenon after it has occurred. For example, recent history saw a major bull market that occurred between 2003 and 2007. During this period, the S&P 500 rose significantly following an earlier period of decline. With the onset of the 2008 financial crisis, the bull market then declined even further.
Characteristics of a bull market
Bull markets usually occur when the economy is strengthening or when it is already strong. They tend to occur in conjunction with strong gross domestic product (GDP) and falling unemployment. In addition, they often coincide with an increase in corporate profits. Investor confidence also tends to rise during a bull market. The overall demand for equities is therefore positive, as is the general tone of the market. In addition, there is a general increase in the volume of IPOs in bull markets.
Some of the above factors are more easily quantified than others. While corporate profits and unemployment are quantifiable, it is more difficult to assess the general tone of the market, for example. At the same time, the supply and demand for securities is shifting. Supply is low while demand is high. Investors are eager to buy securities, while few are willing to sell. Furthermore, in a bull market, investors are more willing to participate in the market in order to make a profit.
Investors who want to profit from a bull market need to buy early. Why is that? So that they can take full advantage of rising prices and sell them when they have reached their peak. Although it is difficult to determine when the trough and peak will occur, most losses are minimal. And they are usually temporary. We will now review some of the most popular strategies used by investors during a bull market. Given the difficulties in assessing the current state of the market, these strategies do carry a certain level of risk.
How to profit from a bull market
The Buy and Hold strategy:
One of the most fundamental investment strategies is to buy a particular stock and hold it. To possibly sell it later. This strategy does of course require a degree of confidence on the part of the investor. After all, why hold on to a stock if the price is not going to rise? The general sense of optimism associated with bull markets certainly helps to fuel the ‘buy and hold’ approach
The retracement strategy:
A retracement is a brief period during which the general price trend of a security is reversed. Even during a bull market, it is unlikely that stock prices will only rise. Most likely, there will be short periods during which small troughs will occur. Although the overall trend continues to rise. Some investors watch for a retracement in a bull market and buy during these periods. The idea behind this strategy is that, assuming the bull market continues, the price of the stock in question will quickly rise again. Thereby retroactively offering the investor a reduced purchase price.
The “swing trading” strategy:
Perhaps the most aggressive method for taking advantage of a bull market is the process known as “swing trading”. Investors using this strategy play a very active role. They use short selling and other techniques to try to achieve maximum gains. Applying these techniques when changes occur in the context of a strong bull market.
Bull market vs Bear market
The opposite of the bull market is the bear market, characterised by a fall in prices and a general sense of pessimism. There is widespread belief about the origin of these terms. It comes from the way these animals attack their opponents. A bull pushes its horns upwards. While a bear sweeps its paws downwards. These actions are metaphors for the movement of a market. If the trend is rising, it is a bull market. If the trend is falling, it is a bear market.
Bull and bear markets often run in tandem with the economic cycle. This cycle has four phases: expansion, peak, contraction and trough. The appearance of a bull market is often a strong indicator of economic expansion. Public opinion about future economic conditions influences stock prices. If it is positive, the market often rises. This often happens even before broader economic measures begin to turn the situation around. Similarly, bear markets generally establish themselves before the economic contraction set in.
To summarise, here are the key points to remember
A bull market is a period of time when the price of an asset or security is continually rising.
The commonly accepted definition of a bull market is where stock prices rise by 20% after two declines of 20% each.
Traders use various strategies, such as enhanced buying and holding and retracement, to take advantage of bull markets.
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