Whether you're a seasoned stock market investor or just starting out, understanding what a bull market is and how it compares to a bear market can be crucial. Defined as a continuous trend toward higher prices over time, a bull market offers investors plenty of opportunities to earn sizable returns. While timing the market is rarely a good idea, understanding the general upward or downward trend of the stock market can help you determine how you make your dollar yield the largest possible returns.
What Is A Bull Market?
A bull market occurs when the market trends towards sustained rising prices with the expectation that they will continue to rise in the future. While exact definitions of a bull market vary, some people define a bull market as a rise of 20% of a particular index, individual stock or other investment from its most recent lows.
Most people use the term “bull market” to describe the movement of the stock market, often specifically broad-market indices like the Dow Jones Industrial Average or the . However, it can also refer to any type of traded asset that experiences an extended period of price escalations such as bonds, gold and real estate.
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Characteristics Of A Bull Market
Bull markets are often associated with high investor confidence and positive public sentiments around the stock market.
Here are some characteristics that are often found in a bull market:
- Increased trading activity: Investors may buy assets with the expectation that their stock values will continue to rise because of the perceived rising of prices, increasing overall trading activity.
- Prices on securities rise: This demand for bullish stocks only further increases its value, creating a feedback loop that further drives up prices.
- Higher dividends for shareholders: With the stock's price rising, companies may increase the dividends they pay out to shareholders.
How Do Bull Markets Happen?
A bull market often happens when the overall economy is humming along. When the country's overall gross domestic product (GDP) is rising, it boosts several facets of the country's economy. Unemployment may drop along with corporate profits rising, causing an increase in consumer confidence.
When the overall economy is strong, it often leaves people with some extra money available to save and invest. People see the prices of stocks going up, which often causes them to put even more money into their investment accounts, with the hope that prices (and returns) will continue to increase.
History Of Bull Markets
Here are a few examples of historical bull markets:
- December 1987 to March 2000: from just after the October 1987 market crash through the "dot com" bubble bursting
- March 2009 to February 2020: ending at the start of the COVID-19 pandemic
- March 2020 to January 2022: after the market dropped significantly at the start of the pandemic, it quickly shot back up and entered into a bull market for nearly 2 years
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Tips For Investing In A Bull Market
Here are a few tips for investing in a bull market. Please consult a financial professional to discuss your financial situation and goals before making any investments.
Buy And Hold
If your financial strategy is long-term investing, whether we are currently in a bull market or not matters less. If you have a very long-term investment horizon, fluctuations over days or even years may not matter to your overall strategy. Remember though that buying and holding may not be the best option for you if you’re looking to pull your money from financial markets in the short term.
Diversify Your Portfolio
Another strategy for investing in a bull market is to diversify your portfolio. Even in a bull market, some stocks go up while others go down. Even the stocks that go up are likely to go up by different amounts. Investing in ETFs and mutual funds can help bring more variety to your portfolio, since owning one of these is similar to owning hundreds of individual stocks or more.
Focus On Growth Areas
Growth investing is when you invest in new or emerging companies whose profits and earnings are expected to exceed the typical average range of their market or industry sector. During a bull market, picking the right growth stocks may help you supercharge your returns. A financial advisor could assist you in finding these opportunities.
Bull Vs. Bear Market
In a bull market, stock prices go up, while in a bear market they go down. Some believe that their names come from how each animal is known to attack: bulls with their horns up, and bears bringing their claws down.
Bull markets and bear markets are two trends that serve as opposites of each other. Whereas a bull market is marked by rising prices, a bear market is when the market faces a downturn of at least 20% after a recent high. The start of a bear market indicates the end of a bull market.
Bull Market FAQs
Are we in a bull market?
While definitions of a bull market vary, one common definition is a rise of 20% of a particular index, individual stock or other investment from its most recent lows. To determine if we are currently in a bull market, you can look at the most recent historical low point for a particular stock or index and calculate whether stock prices have risen by over 20%. A bull market then ends when stocks fall 20% below their most recent high point.
Is it good to buy in a bull market?
Deciding whether to buy or sell shouldn't necessarily only depend on whether the overall market is in a bull market or a bear market. Even in a bull market, the overall stock market may go down on a daily or weekly basis. Additionally, individual stocks or indices may go up or down regardless of whether or not the overall market is in a bull market. It’s best to work with a trusted financial advisor to determine the best moves for your money.
How long do bull markets usually last?
It's difficult if not impossible to tell how long a bull market might last. In the past, some bull markets have lasted for only a few months, while others have lasted for over a decade. It's important to understand also that the definitions of bull and bear markets are somewhat arbitrary — on a daily or weekly basis, stocks and indices may go up during a bear market or down during a bull market.
The Bottom Line
While a bull market can help you grow the value of your assets, it will be easier to make the most of it if you have an overall investing strategy. Remember, every bull market ends at some point, so you'll want to be prepared for the eventual bear market. Investors who understand that no market trend lasts forever are best equipped to ride the highs and lows of trading assets.
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