Everybody loves to make money in the stock market. Bull market are when stock prices tend to show sustained upward direction. During such times, most investors make money, irrespective of their skills, making bull markets everybody’s favourite.
This article talks about what a bull market in the stock market is, its characteristics, indicators and causes, differences between bull markets and bear markets, and finally, how you can benefit from bull markets.
What Is A Bull Market?
A bull market is when the prices of various securities in financial markets are growing or expected to grow. Though the term ‘bull market’ is commonly used for the stock market, bonds, commodities, currencies, etc., it can also have a bull market.
Usually, a 20% or more increase in the prices of securities, compared to their recent lows, indicates a bull market.
Understanding Bull Markets
A bull in a stock market is a speculator who purchases stock with the intent to sell it with profit as soon as its price grows.
Bull markets usually occur when investors are optimistic about their investments in the financial market. Rising asset prices and returns further boost investors’ confidence. Though, the bull market does not mean the price will only keep growing or will not fall. It means that the overall price trend is upward.
A stock bull market can last for several weeks, months or even years. For instance, one of the longest bull markets in India lasted for over ten years, from March 2009 to January 2020. In that period, Sensex gave over 421% returns. However, accurately predicting a bull market is challenging as it can only be spotted in hindsight.
Characteristics Of A Bull Market
High investor confidence
One common trait of a bull market is that investors may be optimistic and have higher confidence in investing. It may be reflected by the overall increase in demand for stocks. Additionally, there may be increased IPO activity, and investors may be highly participative.
Strong economic outlook
The bull market often takes place in a robust or strengthening economy. When the total output in an economy (GDP), corporate profits, and employment grows, it may be reflected in the stock market performance and lead to a bull run in the stock market.
Rising benchmark indices
In a bull market, usually, the benchmark indices that track the performance of several big companies (according to market capitalisation) continue to rise.
How To Identify A Bull Market?
Here are some indicators that may help you identify a bull market.
Market rally
One of the significant indicators of a bull market is a market rally. When the prices of stocks, bonds or indices show a sustained movement in one direction for a period, it is called a market rally. It may result from increased stock demands due to higher disposable income in investors’ hands.
Lower bond yields
You may also identify the bull market by looking at bond yields. If the interest rates on bonds keep falling, investors may prefer putting their money into stocks, expecting higher returns. Consequently, the demand for stocks and stock prices may rise, resulting in a bull run.
Causes Of A Bull Market
Positive economic growth
When an economy’s real gross domestic product (GDP) rises, other economic indicators such as employment, the standard of living, etc., may also improve. Consequently, companies’ profit margins and earnings growth rates may also improve. Such a strong economic outlook may result in a bull run in the Indian stock market.
Tax cuts
When the government adopts an expansionary fiscal policy by cutting taxes, the investors may be left with better savings. As a result, they may choose to invest more, leading to rising prices of financial assets.
Lower interest rates
Lower interest rates on fixed-income securities may influence investors to invest in other avenues with higher potential returns. When more investors choose to invest in the stock market, the stock prices go up and may result in a bull run in the Indian stock market.
Also Read: What Are The Different Stock Groups On BSE?
Bull Vs Bear Markets
The bear markets generally represent the opposite scenario of bull markets. Here are some differences between bull markets and bear markets.
| Points of difference | Bull market | Bear market |
| Meaning | When the stock prices rise by 20% or more compared to their recent lows. | When the stock prices fall by 20% or more compared to recent highs. |
| Causes | Positive economic performance, tax cuts, lower bond yields, etc. | Poor economic performance, recession, wars, stock market bubble bursting, etc. |
| State of economy | Rising GDP, employment, sales and profits of corporations, and overall stronger economic outlook. | Falling GDP, employment, sales and profits of corporations and overall weaker economic outlook. |
| Investors’ stance | Optimistic | Pessimistic |
| Investment actions | Probably more investors would prefer buying stocks or other financial securities. | More investors may prefer selling stocks or other financial securities. |
How To Make Money In A Bull Market?
- Beginners may choose to enter the Indian stock market in a bull run, as the overall positive tone of the market may give them confidence. In a bull market, there may be lower chances of significant loss. However, investing after a thorough understanding and research is always advisable.
- A simple strategy to take advantage of a bull market is to buy stocks at lower prices and hold them until their prices peak. However, accurately spotting them is difficult and risky.
- If you have invested in large-cap companies, you may benefit from higher dividend yields (dividends as a percentage of stock prices). On the other hand, if you have invested in small-cap and mid-cap companies, you may benefit from capital appreciation. However, to make a wise investment decision, knowing the reason for the significant price rise of such stocks is important.
- Call option buyers may benefit from a bull market. You may benefit if you buy call options at a lower strike price and the stock price goes above the strike price.
How Does a Bull Market Impact a Country?
The impact of a bullish trend in the stock market on a country’s economy and its financial landscape is substantial.
As share prices climb, investors witness a surge in assets, triggering increased consumer spending and bolstered confidence. This surge often propels economic growth as investors feel more secure about their financial standing and become more inclined toward discretionary purchases.
The escalation in stock prices also amplifies the worth of retirement and investment portfolios, providing individuals with a deeper sense of financial security and facilitating their journey towards achieving financial objectives.
During a bull market, companies find it more feasible to raise capital through equity offerings. This stimulates business expansion and encourages investment in new ventures, further propelling economic growth.
The overall optimistic sentiment in a country’s investment climate can attract foreign investors, leading to capital inflows and fortifying the nation’s currency.
However, despite the positive impacts, a bullish market can pose potential risks. For instance, it may result in asset bubbles, inflating asset prices to unsustainable levels. This can trigger intense market discipline or even a bear market, resulting in adverse economic outcomes.
To mitigate these risks, countries can implement regulatory measures. Authorities may impose restrictions on leverage and margin lending to prevent the formation of asset bubbles. Additionally, mandating companies to disclose comprehensive reports about their financial status and risks can empower investors to make more informed investment decisions.
Final Thoughts
Bull markets often attract investors. Investing in the bull market may not be bad, and it may also offer good returns. However, trying to time the market in the bull run is riskier and may harm investors’ financial health. Therefore, it is essential to make every investment decision cautiously and carefully.
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FAQs
The reason is that bulls lift their horns while attacking their prey. Bears, on the other hand, bear down on their prey. From this comes the belief that it is a bull market when stock prices go up.
As the stock or other security prices do not seem to rise continuously, we might not be in a bull market as of August 2022.
There is no fixed timeline for a bull run, which may last for months or even years.
