What Is a Bull Market?
In asking what is a bull market, the simplest answer is that it is a market showing confidence and upward movement, and the widely-held belief that strong results will continue. This confidence is demonstrated in a number of areas. The prices of stocks rise, and major market indices such as the Nasdaq also go up. There is also an increased volume of trading, and we may also notice a larger number of companies entering the stock market.
These signs of market confidence and optimism are known as bullish characteristics, and if these characteristics are evident for a length of time, it will often be stated that we have entered a bull market. This is not technically correct however, as the recognized qualification of what is a bull market is a rise of at least 20% across the market for a prolonged period of time. The generally accepted length of time for which these increases must occur before the trend can be classed as a bull market is two months.
When there are signs of increased confidence over a shorter period than two months, or with lower increases than 20%, the upward movement may be considered as a bullish trend. This trend may continue and become a fully-fledged bull market, or it may simply be a short-term movement which then reverts to a stagnant or downward moving market.
Another criterion for what is a bull market is that it is a market in which investment prices rise faster than their historical average over an extended period.
There are various factors that can contribute to the beginning of a bull market including economic recovery or an economic boom. Other factors include the supply versus demand for different securities, raising and lowering of interest rates by the Federal Reserve, particular stock interest, and the general spending habits of the public.
During a bull market there is a strong demand for securities and a relatively weak supply of them. Many investors want to purchase shares or options, but most potential sellers are holding onto their investments in the belief that prices will continue to rise. Because they wish to purchase shares or options that are in short supply, many investors are prepared to pay higher prices, and this in turn continues to drive the prices up.
The increased trading that occurs during a bull market is a sign of investor optimism. Investors believe that prices will continue to rise, and stocks are purchased in the anticipation of making capital gains.
As well as applying to market conditions, the term “bull” is also used to describe investors that believe prices will continue to rise, and invest accordingly. The typical bullish investor follows the old maxim of “buy low and sell high.” Their general trading strategy is to buy commodities at a price they believe is a “low” and sell them again when they believe the price has reached its “high.”
For any investor, a wide spread of quality investments is the foundation of a good trading strategy, however, during a bull market, a well informed investor can potentially make excellent gains with a few calculated risks. Adopting a bullish approach to investing can be beneficial for most investors. Throughout history the stock market has always shown a positive return in the long term.
A bullish market trend often begins before the general economy shows clear signs of recovery. This trend can be greatly instrumental in the general economic recovery, as the increased volume of trading, and investor optimism helps to get the stagnant economy moving again. In return, the recovering economy keeps the bull market trend moving upwards, creating a true bull market.
The psychology of the investors is an important factor in market movement and trends, because the behavior of the market is based in part on the behavior and mindset of the investors. The thoughts and fears of investors, and their subsequent trading strategies, help determine whether the market goes up or down.
Economic activity plays a very important role in determining the movement of the stock market. The economy has a huge effect on businesses and, of course, businesses are the foundation of stocks traded on the market.
One key factor that can help recognize what is a bull market is that the economy is strong and stable. Both economic growth and business activity are high. Consumer spending is also high due to an increased liquidity which provides extra spending money.
These factors further strengthen the economy, which in turn creates more upward movement in stock prices. A big factor in creating this positive cycle is that, because businesses are making profits they can afford to expand, which leads to even higher potential profits.
Some famous bull markets occurred in the 1920s and the late 1960s. A notable example is the bull market which commenced in the early 1990s which saw the U.S. equity markets grow at the fastest rate in history. Bull markets are noted as times when there is low unemployment and low inflation, as well as increased levels of productivity.
Trading in a bull market can be risky, however. Eventually the market must reach its peak, and what goes up must come down. Because the volume of trading in a bull market is high, we can experience a situation known as the bubble effect. This occurs because stock prices rise so high and so fast that they become overvalued. When this situation occurs, the bubble will burst at some point, and the market can collapse rapidly.
A stock that is overvalued means that the current price of that stock is not justified by its earnings outlook or price/earnings (P/E) ratio. When a stock becomes overvalued, a correction, or drop in price, is expected. When stocks become overvalued across the board, this is a time when a market collapse becomes likely.
Overvaluation may result either from high volumes of trading due to overconfidence from investors, thereby raising the stock’s price, or from a decline in a company's financial strength which lowers the stock’s value.
While there are no hard and fast rules for profiting in a bull market, there are many investment methods which savvy investors take advantage of. By understanding what is a bull market and which types of trading strategies to use, a bull market can definitely present good opportunities for making a profit.
In summing up what is a bull market, the key point is that it is a strong and confident market showing prolonged upward movement, and investor optimism.
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