What Is a Bull Market?

Are you an investor or a trader? Looking to make money efficiently? Then, get yourself familiar with the bull market. Do you know why a bull market is called so? 

A bull market is often linked to a charging bull. Just as the powerful animal ‘bull’ attacks with upward force, a bull market refers to a market with a continuous and forceful move upward in stock prices.

This means, the bull market occurs with more trades and investment in shares, leading to an increase in stock prices which encourages further purchases. This, in turn, triggers a self-realizing positive feedback loop where stock prices and investors’ optimism rise. 

Understanding the Bull Market?

A bull market is a type of state of a market that involves an upward trend in prices or expectation of a sustained rise in those prices.

During this time as investors, we expect high performance of the stock market and contribute our earned money easily into this sector. The improvement of consumer confidence results in raising the amount of money increase for this type of business and the annual turnover, which leads to the growth of companies’ profits to be paid to shareholders.

How to Recognize a Bullish Market?

Distinguishing a bullish market is challenging because share prices in the stock market are always in a constant state of fluctuation. Furthermore, the concept or parameters of the bull market are relative to stocks which experience a sustained trend of rise due to several socio-economic-political factors. This is a sign of a bullish market.

However, a universal understanding of a bullish stock market can be defined as a prevalent high for at least two months with a definite increase in the stock prices of at least twenty per cent.

Such indicative bullish trends can be seen through the following parameters –

1. Market Rally

Any extended and consistent change in the stock prices, regardless of the direction the change is taking is called a bull market rally. A share market bull rally for a long period often takes place owing to demand-side policies of an expansionary nature such as lower rates of interest and deeper tax rate cuts. Governments can also spend a lot of money on the development of the country by putting up structures, constructing schools, hospitals, etc.

Such expansionary policies help to ensure the availability of adequate funding for investment in shares which drives up the stock prices as a result of a higher level of speculative demand arising from a higher income level.

2. High Trading Volume

Higher trading volumes especially where there are more buyers than sellers may be an indication of improving market sentiment. This typically occurs simultaneously with a bullish trend.

3. Positive Corporate Earnings

This increases confidence among the investors because the companies become profitable and their future outlook is also good hence inflating the market with investments.

How Increased Economic Demand Leads to a Bullish Market?

During the period of high monetary or fiscal expansion, the economic condition enhances disposable incomes in the hands of residents hence an increase in demand for products and services that are available in a given country. The amount that individuals spend speculatively is also increasing in any financial period. 

An expectation that stock market indices will increase influences existing prices and ensures sufficient resources with relative public limited companies. This in turn gives a high turnover assisting in the production of high total output. An increase in productivity levels leads to the GDP of a country, indicated by the market value of total goods and services manufactured in an economy, to rise.

Reasons for Having a Bull Market

1. Strength of an Economy

A bull market is observed in nations with stable policies supported by the right implementation of policies to encourage the production of products and services and other conditions that enable sales.

2. Foundation of Large-cap Companies

• Companies with greater market capitalization contribute significantly to the major market indices through which stock market bull or bear is often determined.
• Random movements are more prone to impact small and mid-cap stocks which may provide a misleading signal regarding the actual upward move in the market.
• Mainly, the bullish markets are indicated by increasing benchmark index points as large firms have made huge progress and have long-term impacts.

3. Business Cycle Fluctuations

• The business cycle includes an upward phase often referred to as the boom phase of an economy, when the capacity level and real growth rates are notable, this is evidenced by elevated GDP and a bullish stock market.
• Also, the unemployment rates in a country are very low and there is an improvement in the per capita income of a person. Another situation is when consumers have more money to spend, and hence investors have an optimistic attitude towards the market and are readily investing.

Risks Associated with Bull Market

While bull markets can be profitable for investors, they also come with risks:

1. Overvaluation: During the bull market, options can be expensive and stock may be overpriced because of the increase in prices than the underlying fundamentals like ROE and EPS. This may ultimately create a bubble within a market, which may burst, and subsequently mean that the stock prices will drop.

2. Speculation: When prices go high, people can turn into speculators and invest in very tender traps. In this case, the investors may feel overconfident and indulge in risky investments believing that the prices of the asset will keep rising to infinity.

3. Market Correction: Bull markets are usually succeeded by market corrections or bear markets. Those investors who come to the market after the onset of a bull market may experience heavy losses when the tide turns.

Wrapping Up

A bull market provides many opportunities for investors to invest in higher stock prices and a stable economic environment. However, it also includes the specific risks of high appraisal, the activity of market manipulators, and the possibility of market crashes. It is therefore important that the existing dynamics be well understood to make the right investment decisions.

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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme related document carefully before investing.