Bull Market: What are its reasons and how can you benefit from it?
What is a bull market? A protracted period during which the prices of securities or other assets rise 20% after falling 20% twice is referred to as a bull market. A bull market fuels and expands due to investors' eagerness to purchase and retain securities and is heavily influenced by consumer confidence in assets such as stocks, bonds, gold or oil, currencies, or real estate.
Characteristics of a bull market
The following are the characteristics of a bull market:
Bull markets correspond with robust economies and an upbeat market mood. When the economy strengthens in line with the strong gross domestic product (GDP), inflation is consistently under control, and corporate profits rise, investors are more upbeat. This improves investor enthusiasm, which results in a bullish market mood.
Strong confidence among investors:
A healthy economy and high investor confidence support market expansion. Stock prices rise due to a favourable economic outlook and positive attitude.
Significant business success:
A bull market reflects a positive business and economic environment. Businesses see an improvement in their bottom line and profitability in line with a developing and strong economy. Additionally, during periods of strong economic expansion, more private companies conduct initial public offerings, which fuels a bull market even more.
Lower rates of interest:
Banks cut their lending interest rates in an expanding economy, which increases the money supply in the economy, which in turn, encourages investors to either make more purchases or invest the additional amount, thereby affecting the businesses bottom line. In contrast, during a recession, banks raise loan interest rates, the money supply decreases, and investors prefer saving instead of investing, which causes a bear market.
Global financial investments:
Investors are more inclined to make foreign investments during a bull market. In a bullish market, they are motivated to increase their current holdings.
Bull versus bear markets
In contrast to a bull market, a bear market is characterized by long-term declines in the prices of stocks by over 20%. Bear markets see a significant fall in prices over an extended period of time. Negative investor sentiments accompany this fall in prices.
Investor confidence declines during recessions when business profits fall. A positive market sentiment leads to rising prices, whereas a bearish market mood leads to decreasing prices.
As investors start selling their equities, supply rises, and demand falls. Sell pressure starts to build as prices peak, and investors start looking for a way out. Investors begin to concentrate on various investment tactics, like short selling. Bear markets, like bull markets, can continue for weeks, months, or even years.
How to take advantage of a bull market
Buy and Hold:
The most common investing approach involves purchasing a stock, holding onto it until its peak and then selling it. Investors must have a high level of confidence in this technique.
Increased Buy and Hold:
It involves adding to the simple purchase-and-hold strategy -- investors purchase more shares for each 1% gain in the stock price. However, increased buying and holding means extra risks.
Retracement is a brief period when the price of security reverses an ongoing trend. In a bull market, some investors watch for retracements to buy at lower prices and sell at higher prices.
In general, nobody can predict when a bull market will turn into a bear market. These market changes take place gradually. As a result, it is difficult to forecast whether prices will rise further or when the market will crash.
Finally, it is evident that bear and bull markets significantly impact market investments. Thus, it is essential to consider the market's performance when making investment selections. Bull markets are always alluring. But investors should stick to their long-term objectives and plans.
Q. How do you make money during a bull market?
One must maximize the potential of the tools accessible in each given market to succeed. In bull markets and times of high market performance, it is advisable to use long positions in stocks, ETFs, and call options. On the other hand, bear markets are excellent for short selling, put options, and inverse ETFs. These enable investors to profit from the market's decline.
Q. What causes a bull market to end?
First, a bull market may persist long enough for many investors to think it is coming to an end, at which point the market becomes exhausted and no more buyers are available. Occasionally, certain impactful economic events can change the market's trajectory. For example, when coronavirus was declared a pandemic, the bullish sentiment in the markets across the world plummeted within hours, with Sensex and Nifty ending the day at four-year lows on March 23, 2020.
Q. How should one invest in a bull market?
The ideal way to invest in a bull market is to buy and hold more assets when prices fall even slightly. This way, you could clock profits when you sell at a higher price later.
Return on equity (ROE) is a metric for evaluating a company's financial performance. It demonstrates the connection between earnings and investor returns.