Last editedJune 20212 min read
As any investor knows, it’s important to keep a close eye on market fluctuations to make the wisest decisions. In the case of sustained trends, you’ll need to know the difference between a bull and bear market. When it’s a bull market, prices are on the rise. Here’s how to make the savviest investment moves.
What is a bull market?
So, what is the meaning of “bull market”? Essentially, it’s a financial market with rising security prices. While stock prices continuously rise and fall throughout any trading period, the term “bull market” refers to situations in which the price rises over an extended period. Bull markets typically last for months, if not years. A common definition used to answer the question of ‘what is a bull market’ is when stock prices rise by 20%.
Along with higher security prices, bull markets are marked by investor optimism, consumer confidence, and a booming economy. With unemployment figures low and the economy on the upswing, investors are more willing to buy which propels the market upward.
Types of bull markets
Any type of financial index or market can experience bullish periods:
What causes a bull market?
While there are a number of conditions that lead to a bull market, they typically occur alongside a growing, healthy economy. This is because stock prices are driven by investor expectations and the ability of businesses to generate profit.
In addition to investor confidence, indicators of a bull market include a high gross domestic product, low unemployment figures and increased consumer demand. All of this generates optimism, encouraging investors to purchase more shares.
Bull vs. bear market
The opposite of a bull market is a bear market. The terms bull and bear market are said to stem from the fighting styles of each animal; while bears swipe their paws down to attach, bulls swipe their horns up. This gives some indication of the major differences between bull vs. bear market. While bull markets are associated with optimism and price growth, bear markets feature pessimism and falling prices.
How to make the most of a bull market
A common adage in investing is to ‘buy low, sell high’, so how does this apply to a bull market when prices are on the rise? You can make smart investments in either a bull or bear market, but it’s all in the timing. Here are a few tips to get it right:
Buy stocks early in the bullish period, then sell when they have reached peak pricing. This is called a ‘buy and hold’ strategy, fuelled by investor confidence in the bull market.
Use an increased buy and hold strategy to continue purchasing increasing quantities of the stock as prices rise, selling all of the acquisitions at the peak. You’ll need to be comfortable with increased risk to pursue this strategy.
Confident investors might also opt to ‘buy the dip’ or pursue a retracement strategy. A retracement is a short period during which the stock’s price drops in value before continuing to trend upward. If you can time it right to buy during these dips in price, you could enjoy a discounted purchase price and generate a higher profit when it’s time to sell.
The bottom line
Whether you’re just starting out with an investment strategy or are seeking new ways to diversify your portfolio, a bull market can be a good time to buy. With prices rising, it means there’s the potential for higher returns. The key is to purchase your stocks early on at the first stages of a bullish upswing, selling as close to the peak as possible. By contrast, bear markets carry with them a higher potential for loss. As a result, short-term strategies tend to work better with bull markets, and long-term strategies with bear markets.
Ultimately, it can be difficult to predict which way the markets will swing next, so you should look at long-term, diversified portfolios to weather the ups and downs over time.
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