Understanding a Bull Market
Do you know what is a bull market? A bull market occurs in the stock market where many people are purchasing shares with the hope that the value of the shares will rise and that they will be able to resell them for a profit shortly.
During this time, stockholders have high hopes for the stock market’s performance and pour large sums of corporate profits. Consumer confidence is rising, which boosts cash flow into this industry and enables businesses to raise annual turnover, which promotes earnings distributed to shareholders.
Why Is It Called a “Bull” Market?
It was once believed that the word “bull” originated from how the bull assaults its foes. In other words, a bear will scroll down while a bull will raise its horns into the air. Then, this behavior was metaphorically described as a market movement. As a result, a bull market was said to exist when the trend was upward.
The term “bull” is far more uplifting than “bear” when referring to the financial markets. A bull market and a bull (or “bullish“) speculator are terms for those who make bonds and other assets in the hope that stock prices will rise.
This connection to speculation appears to have its roots in the brutal blood games of bull and bear baiting, at least in part. Around the year 1200 in medieval times, these competitions first appeared. People would go to competitions and place huge bets on the outcome of an event involving a bull or a bear. The connection between this and how the phrases are currently employed in speculative actions on the stock market is clear.
Characteristics of a Bull Market
Bull markets frequently emerge when the economy is either expanding or already robust. They typically accompany increasing business revenue, a high GDP, and a drop in the unemployment rate. Investor confidence will often rise in a bull market. Both the general market sentiment and the demand for stocks will be positive. Furthermore, there will be a sudden spike in IPO activity during bull markets.
Some of the criteria above are easier to quantify than others. Although business profits and unemployment may be measured, it can sometimes be challenging to determine the general mood of market discussion, for example.
Securities will be in short supply while demand will be high, creating a seesaw effect. Few investors will be willing to sell stocks, but investors will be eager to purchase them. Traders are more eager to participate in the (stock) market during a bull market to make money.
When businesses are reliable and predictable, market indices prosper. Typically, stock brokerages manage continuous buying when interest rates are stable, or inflation is growing steadily. Thus, there is overall stability in the market.
What is a Bear Market?
Investors’ pessimism and lack of confidence are traits of bear markets. In a bear market, investors may appear to disregard any encouraging press and begin selling aggressively, driving prices further lower. Because although investors may be pessimistic about a specific stock, the market may not be affected by their opinion.
Stock prices typically reflect predictions of future cash flows and company profits. Prices of stocks may fall if growth forecasts become bleak and expectations are dashed. Long periods of weak asset prices can be brought on by herd behavior, anxiety, and a rush to protect against downside losses.
A bear market occurs by various factors, but in general, they include a weak, halting, or sluggish economy, bursting market bubbles, pandemics, wars, geopolitical crises, and major economic structural changes as the transition to the economy.
Bull Market vs. Bear Market
An ongoing increase in security prices characterizes a bull market. Investors predict that the present rise in share prices will continue for a long time. During this bull market stage, it is typical to observe that the nation’s economy is robust and job levels are high. In contrast, everything declines, and prices drop during a bear phase, creating a downward trend.
Because shareholders anticipate more of the same, the negative spiral is prolonged. There is a slowdown and higher unemployment rates at this stage.
Bull and bear markets frequently coexist with the economic cycle, which has four phases: expansion, peak, contraction, and trough. A growing economy is often predicted before a bull market even gets started.
Because investor attitudes about future economic conditions influence stock values, stocks frequently increase in value even before general economic measures like GDP growth begin to trend upward. Similar to how a bear market usually starts before a true economic downturn.
How Long Does Bull Market Last?
On average, bull markets typically endure for five years and two months, although their actual lengths can vary greatly, from six months to more than ten years. Bull markets last far longer than bear markets.
There have been calls from several analysts that the present stock market bull market, which has been going on for more than ten years, may end. In actuality, this bull market has lasted the longest in S&P 500 Index history, although bull markets typically last much less on average.
According to market research company InvesTech Research, the average length of a bull market since 1932 is 3.8 years. The longest bull market lasted 11 years, from 2009 to 2020.
How do Investors Benefit from a Bull Market?
If you want to make money in a bull market, you should invest early to benefit from growing prices and sell your shares when the market is at its highest. The bulk of losses will be modest and often transient, even if it might be challenging to forecast when the bottom and peak will occur.
Bull markets are accompanied by times of economic expansion and investor optimism. Here are a few strategies for investing in advancing stock markets:
- Long Positions: Simple purchase of a stock or other security in anticipation of a price increase constitutes a long position. As a result, you would purchase security and let it rise along with the bull market. The ultimate objective is to buy the stock at a bargain and sell it again for a profit. The difference represents your profit.
- Call Options: A call option grants its owner the right to purchase a stock at a specific price (the strike price) until a given date in the future (the expiration date). As the price of the underlying stock increases, calls gain in value. Opportunity buyers can exercise their right to purchase stock at the lower strike price and then resell it for a higher price on the open market if the stock price rises over the option’s strike price, making a profit.
- Market Indicators: No one can foretell if a price decline is a corrective or a bearish trend. Additionally, waiting for the rally to reach its top is dangerous because a peak can only be seen in the rearview mirror. Investors are therefore recommended to consult professionals, read widely, pay attention to market indicators, and make logical decisions.
- Long Exchange Traded Funds (ETFs): The majority of ETFs trade like stocks and track a specific market average, like the Dow Jones Industrial Average (DJIA) or the Standard & Poor’s 500 Index (S&P 500). Investors may buy an ETF if they think the market it monitors will rise. An ETF based on the index, for instance, will increase by about the same percentage if the S&P 500 increases by 10%. ETF operating costs and transaction charges are typically modest, and there is no minimum investment requirement. ETFs aim to mimic the index movement while incurring fewer costs.
Bull Market Examples
- Post World War II Rally- June 1949 to August 1956
- The Housing Boom/Bubble: October 2002 to October 2007
- The Longest Bull Run in History: March 2009 to March 2020
- Recent History of India-Period of December 2011 and March 2015 in Indian stock markets
Conclusion
In the bear market and bull market, there are a variety of strategies to make money. The key to success is selecting attractive financial tools for every sector and effectively using them. Short selling, put options, and short or inverse ETFs are a few bear market investments that allow investors to profit from market downturns.
Equities, ETFs, and call options can all be long bets during bull markets. Additionally, employing indications to identify the beginning or finish of bull and bear markets is critical.
The stock market has traditionally fared well, with periods of persistent rise (bull markets) and fall (bear markets), as well as glitches and market corrections. But as you may already know, past success does not guarantee future success. You can handle market ebbs and flows and achieve continuous success by being aware of the market’s direction, developing a thoughtful long-term plan, and building a diversified portfolio.
Last Updated on by kalidaspandian