Whether you are a business studies student or someone who has just started looking for investment options, there are two major terms that you will come across multiple times –‘bear’ market and ‘bull’ market. Market conditions have a significant impact on an investment portfolio and since bull market refers to a certain market condition, it is important to understand what this term means.
Read on to deepen your business knowledge as we cover here the basics of a bull market, including what is bull market, characteristics of bull market, example of bull market and more.
What is a Bull Market?
The simplest definition of a bull market is that it is market condition in which share prices are increasing or are expected to increase soon. Thus, it’s a period of economic prosperity.
The term normally applies to stock market, but it can also be used to refer to various other trade items including bonds, currencies, real estate and commodities. A common understanding of bull market is that it’s a situation where stock prices rise by 20% following a decline of the same proportion.
Example of Bull Market
The most significant example of bullish trend observed in the American stock market was the market condition that occurred around 40 years back. Lasting for several years (1982-early 2000), this was a time when investors benefitted from high returns as stock prices rose by over 400 percent!
Characteristics of a Bull Market
Besides being characterized by optimism and strong investor confidence, here are some other major characteristics of a bull market.
- They usually occur after a bear market as the economy undergoes a cycle of slump and growth.
- During this time, corporate profits rise as the GDP strengthens and unemployment decreases.
- The amount of Initial Public Offering (IPO) activity rises because investors participate more willingly in the hope of making handsome profits.
- The demand for securities is high while the supply is low as only a few people are willing to sell during this time.
How to Take Advantage of a Bull Market?
In a bull market, the ideal investor will buy the stocks during the early trend and then sell them at a higher price once they reach the peak.
A bull market presents the ideal time to sell as everyone is on a buying spree. However, remember that the risks greatly increase when a bull market nears its peak because the higher a market goes, the more impactful will be the fall after that rise.
Quick fact: Are you wondering why is it called a bull or a bear market? Well, it comes from a 16th Century entertainment where people loved to watch dogs fighting a bull or a bear chained to a post. Eventually people started using the terms bearish and bullish behavior for market conditions based on the manner in which each animal attacks its opponent. A bear swipes its paw down on the prey while a bull drives its horns up into the air to attack. Hence the terms bull and bear markets were introduced.