The actual origin of the term “bull” is subject to debate. The terms “bear” (for down markets) and “bull” (for up markets) are thought by some to derive from how each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down. These actions were then related metaphorically to the movement of a market. If the trend was up, it was considered a bull market. If the trend was down, it was a bear market.
While the stock market has experienced sustained periods of growth (bull markets) and decline (bears), along with blips and market corrections, it has historically performed well. But, as you may know, past performance is no guarantee of future results. Understanding the direction the market is taking and having a carefully constructed long-term plan and diversified portfolio can help you manage market ebbs and flows and achieve sustained success.
The financial markets for stocks, bonds, and commodities are greatly impacted by consumer confidence. And in bull markets, which occur when investment prices are on the rise for sustained periods, confidence is soaring. Propelled by the thriving economies and low unemployment that usually accompany bull markets, investors are eager to buy or hold onto securities, thus creating a buyer’s market.
Why Do Bull Markets Sometimes Falter And Become Bear Markets?
When the economy hits a rough patch, for instance in the face of a recession or spike in unemployment, it becomes difficult to sustain rising stock prices. Moreover, recessions are often accompanied by a negative turn in investor and consumer sentiment, where market psychology becomes more concerned with fear or reducing risk than greed or risk-taking.
A bull market occurs when securities are on the rise, while a bear market occurs when securities fall for a sustained period.
It’s important to understand the differences between bull and bear markets and how they impact your investment decisions.
Working with a financial advisor to develop a plan and a diversified portfolio can help you manage market risk and avoid making emotional investment decisions.
Investing In Bull And Bear Markets:
There are many differences between bull and bear markets, and the way you make investment decisions varies greatly. Having a higher allocation of stocks is optimal in a bull market, where there’s more potential for higher returns. One way to capitalize on the rising prices of a bull market is to buy stocks early on and sell them before they reach their peak. In a bear market, where there is more loss potential, investing in equities should be done with great prudence, since you are likely to incur a loss at least initially. In preparation for a bear market, it may be wise to direct your money toward fixed-income securities.
Another way to prepare for bull and bear markets is through financial planning. Creating a sound plan with a financial advisor will help you avoid one of the biggest traps investors fall into making financial decisions based on emotion. For example, in bull markets, you may have a recency bias that the market will continue to rise, and thus be willing to take more risk than is prudent. In contrast, in a down market, you may act on fear and make rash decisions, such as leaving the market.
Investing For Long-term Success:
While it’s important to understand the direction of the markets, it’s extraordinarily difficult to predict when the transition from a bull to a bear market will take place. Over time, the best strategy for managing market changes has been through long-term strategic asset allocation. Working with a financial advisor to create a diversified investment portfolio can help you weather challenging markets, avoid the near-impossible task of timing the market, and make rational not emotional investment decisions.
Buy and Hold:
One of the most basic strategies in investing is the process of buying a particular security and holding onto it, potentially selling it at a later date. This strategy necessarily involves confidence on the part of the investor: why hold onto security unless you expect its price to rise? For this reason, the optimism that comes along with bull markets helps to fuel the buy-and-hold approach.
Increased Buy And Hold:
Increased buy and hold is a variation of the straightforward buy and holds strategy, and it involves additional risk. The premise behind the increased buy-and-hold approach is that an investor will continue to add to their holdings in a particular security so long as it continues to increase in price. One common method for increasing holdings suggests that an investor will buy an additional fixed quantity of shares for every increase in the stock price of a pre-set amount.
Retracement Additions:
A retracement is a brief period in which the general trend in a security’s price is reversed. Even during a bull market, it’s unlikely that stock prices will only ascend. Rather, there are likely to be shorter periods in which small dips occur as well, even as the general trend continues upward.
Some investors watch for retracements within a bull market and move to buy during these periods. The thinking behind this strategy is that presuming that the bull market continues, the price of the security in question will quickly move back up, retroactively providing the investor with a discounted purchase price.
Full Swing Trading:
Perhaps the most aggressive way of attempting to capitalize on a bull market is the process known as full-swing trading. Investors utilizing this strategy will take very active roles, using short-selling and other techniques to attempt to squeeze out maximum gains as shifts occur within the context of a larger bull market.
Characteristics Of Bull Market:
Bull markets generally take place when the economy is strengthening or when it is already strong. They tend to happen in line with the strong gross domestic product (GDP) and a drop in unemployment and will often coincide with a rise in corporate profits. Investor confidence will also tend to climb throughout a bull market period. The overall demand for stocks will be positive, along with the overall tone of the market.
While corporate profits and unemployment are quantifiable, it can be more difficult to gauge the general tone of market commentary, for instance. 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 take part in the (stock) market to gain profits.
What Makes Stock Prices Rise In A Bull Market?:
Bull markets often exist side-by-side in a strong, robust, and growing economy. Stock prices are informed by future expectations of profits and the ability of firms to generate cash flows. A strong production economy, high employment, and rising GDP all suggest profits will continue to grow, and this is reflected in rising stock prices. Low-interest rates and low corporate tax rates also are positive for corporate profitability.
Conclusion:
A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most 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.
Prices of securities rise and fall essentially continuously during trading, the term “bull market” is typically reserved for extended periods in which a large portion of security prices are rising. Bull markets tend to last for months or even years.
A bull market is a period 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% after two declines of 20% each.
Traders employ a variety of strategies, such as increased buy and hold and retracement, to profit from bull markets.
