What is a bull market? Definition and meaning
A bull market is a term used to describe a positive trend in the market, where securities (such as stocks or bonds) are increasing in value. The term can also be used in the commodities market, such as oil or gold, the foreign exchange market, or just about anything that can be traded.
A ‘bullish trend’ is typically driven by increasing market optimism and encouraging financial performance.
A bull market is the opposite of a bear market – a term which describes decreasing market prices and a feeling of pessimism.
Cambridge Online Dictionaries says a bull market is:
“A period when the price of shares and other investments are higher than usual, and many people invest because they expect to earn large profits.”
According to the Online Etymology Dictionary, the term ‘bull’ for describing a rising market dates back to 1714.
Some linguists suggest the term came from old German. The Germanic root of the word ‘bull’ meant ‘to inflate, swell, blow’, which could describe a rising market.
What causes a bull market?
It’s virtually impossible to accurately predict how markets will move. There are several psychological and economic factors that drive prices up or down.
Strong demand and weak supply for securities – this means that a lot of people want to buy securities, however, there are very few people selling.
A strong economy – when an economy is strong, businesses typically report impressive profit figures.
Investor psychology – when there is increased market interest, more people make investments in hope of making a profit.
An example of a bullish trend – gold prices soaring between 2004 and 2012.
How to invest in a bull market
So, what should an investor do during a bull market?
One of the best things to do during a bull market is take advantage of the rising prices by buying securities early on and holding onto them – watch their value increase – and then sell them when you believe they have peaked.
But when should you sell?
This can be determined by identifying signs that the market is about to become bearish – through poor performance figures, a dip in the economy, etc.
However, knowing when the perfect time to sell is, is almost impossible to determine (as you never quite know when the market will peak).
One advantage of a bull market is that investors do not have to worry about any sudden huge losses (which is much more likely to occur during a bearish market).
All in all, investors should make the best of a bull market and try to buy securities before they start to dip.
Contrarian investors behave like bears in a bull market and like bulls in a bear market.
Video – The difference between a bull and bear market: