Defining A Bull Market
A bull market is used to encompass a situation in which a financial market witnesses or is expected to witness an increase in prices. Mostly, the term is used with reference to the stock market, however, it can be used to refer to any security that is traded. For example, bonds, currencies, commodities and real estate may each have the term “bull market” applied to them.
Due to the fact that the price of these securities is constantly rising and falling at the time of trading, the term bull market is usually applied to long periods during which a significant portion of the prices of a given type of security are rising. Therefore, bull markets can exist for months if not years.
Understanding What’s Necessary in a Bull Market
Bull markets are characterized by optimism that investors place confidence in their investments and a belief that great results will be there for a long time. It is not easy to consistently predict accurately when the trends that dominate the market may turn. The dilemma is further compounded by the fact that psychological influence and speculation can affect the markets to a great extent.
While there is no prevailing rule that dictates how a bull market can be identified, generally a bull market can be identifiable and defined in situations in which stock prices move up 20 percent. This increase is usually followed by a drop of 20 percent and is followed by a second drop of 20 percent.
Due to the fact that it is difficult to predict a bull market, analysts generally declare a bull market only after the event has occurred.
Demonstrating What Characteristics, a Bull Market
A bull market has the following characteristics.
- A bull market is marked by growth in an already strong economy.
- They usually correspond to conditions of a strong GDP (or GDP) and declining unemployment rates.
- More often than not, a bull market will exist when corporate profits have increased.
- Investor confidence also increases as a result during a bull market.
- During a bull market the demand for the stock will be positive as a whole as well as the general tone of the market is positive.
- IPO activity also increases during instances of active bull markets.
- The levels of supply and demand in securities will be in stark contrast to each other, with the former being weak, while the latter will be strong.
- Bull markets have investors who are eager to take advantage of securities rather than sell them.
- Furthermore, these same investors are more amenable to the idea of participating in the market, so that they can make a profit.
It is important to note that while some of these factors are easy to calculate, others are not easy to calculate. Take for example corporate profits and unemployment, which can be easily calculated compared to the general tone of the market, which are not as easily measured.
Making the most of a bull market
Investors looking to profit from a bull market should buy early so that they can take advantage of price increases and sell after they have peaked. While it is difficult to know when the price will hit its lows and peaks, most losses at this time are usually minimal and only last for a temporary time frame.
Read on to understand more of the key strategies investors use during a bull market.
Buy and hold – This strategy works by buying and holding a given security to potentially sell it in the future. The optimism that characterizes bull markets fuels this approach.
Enhanced Buy and Hold – This strategy works as a variation of the previous strategy. The risk posed by it is what sets it apart. Under this strategy, investors must continue to increase their holdings in a given security as long as the price of the security continues to rise.
Retracement Addition – Retracement refers to a minimum time frame during which the general trend of a security’s price changes. It is important to note that even if a bull market does exist, stock prices are unlikely to simply rise. Instead, it is likely to exist for a shorter time frame, during which the prices of these stocks may decline marginally, despite the overall upward trend. Some investors buy when it is a short-term decline. The idea on which this strategy is based is that, if a bull market exists, the price of the security in question will recover from its decline and begin to rise again, giving its investors a discounted purchase price to investors.
Full swing trading – Present as one of the more aggressive ways to take advantage of a bull market, investors who use full swing trading remain in a very active role. They use short-selling among other techniques to increase their profits as changes occur in the context of a large bull market.
A bull market characterized by optimism and several months if not years instills confidence in investors and witnesses an increase in demand and a rise in the price of securities.
About the Author- Gaurav Heera is a stock market analyst & trainer with many years of experience in the field. He also heads DelhiCourses, an institute known for its best Technical Analysis Course in Delhi.