Bull Market Meaning
A bull market is characterized by rising prices of securities or assets lasting for a sustained period of time. It can be used in the sense of trading of stocks, bonds, real estate, currencies or even commodities. But it generally applies to the stock market. Even though there is no measure which determines the bull market. Still, a growth of 20% in the stock prices after two declines of 20% is usually registered by the stock exchanges as Bull market. It is known as a bull market because as a bull attacks by striking its thorns up into the air, a bullish market marks the rise of the economy.
This market situation is characterized by high optimism and expectations of profit by investors. The increased confidence leads to increased investment which further leads to increase in capital of the companies which ultimately increases benefits to shareholders by way of increased return on investment. India has seen six bull markets in the last three decades as per Morgan Stanley India Equity Strategy Report. One of the most significant bull market situations was seen in the period from 2003-2007.
How does Bullish Market work?
In a bull market, the prices keep rising so much that investors start believing that it will never fall. Once these prices reach sky high- much higher than their underlying value and do not fall at all. Investors enter a state of irrational exuberance and start overvaluing the assets. This takes the form of a financial bubble which bursts ultimately and prices fall. When it falls 10%, it is termed as market correction and a fall of 20% marks the end of the bull market and beginning of the bear market. The same percentages in the opposite order mark the beginning of the bull market.
Causes of a bull market:
Stable economy- A bull market is usually prevalent in countries with a sound and stable economy with proper policies and implementation infrastructure to undertake mass production.
Fluctuations in business cycle-The boom in the economy caused due to fluctuations in business cycle also leads to bullish trends in the market. During the boom period, the production increases significantly, GDP increases, unemployment rates fall and per capita income also rises. All this collectively contributes to a bullish market.
Large capital companies- Small and medium capital enterprises get affected a lot even with small fluctuations in the market so they are not suitable to give a clear view of the trends of the market. On the other hand, large capital companies form a significant component of the benchmark indices. A fluctuation in their prices greatly describes the market trends.
How should investors take advantage of a bullish market?
There are few strategies which can be adopted by investors to make profits during a bullish market.
Buy & Hold- Buying securities at its bottom and holding onto it, in order to sell it at a later stage when it reaches its peak.
Increased Buy & Hold– In this strategy, the investors keep adding on to his holding for every increase of preset amount in the price of shares to sell it at its peak. But this involves additional risk too.
Retracement additions- Retracement is a period in which the trend in the bullish market of rising prices gets reversed for a brief time period. Investors should watch out for such retracements and buy securities during those periods to enjoy the benefits of rising prices in a bull market.
Full swing trading- This is an aggressive method of trading where investors take up practices such as short selling & other practices to gain maximum returns in the bullish market.