Bull Market Explained: What It Is and How Investors Can Benefit

Introduction

You must have read the headlines talking about the bull market and the bear market all the time. But have you wondered what is a bull market and why it is named so? The popular explanation is the method of attack used by a bull and a bear. While a bull moves its horns from bottom to up, a bear swings from top to bottom.

Just by looking at this simple explanation, you can easily make out that a bull market refers to the period of rising prices, optimism, economic growth, and investor confidence.

Before you jump right into the thick of things, it is important to first understand the stock market trends and how they affect the stock prices. If you are focused on long-term investing, knowing the market trends can help you ride the tides. 

In this blog, we discuss the bull market, its effects on traders, and the key investment strategies you can use to make the most of such trends.

What is a Bull Market?

If we talk about the technical definition, a trend in the stock market is termed as a bull market if the prices rise by more than 20% from recent lows. Such an uptrend can span from a week to even years. For a layman, you can say that the overall market sentiment is optimistic and the news is full of growth stories, more foreign investment, and rising stock prices.

You can easily predict that the stock market trends in a bear market will be the polar opposite. The prices must fall more than 20% from recent highs to constitute a bear market run. Unlike the bull market, the investor sentiment is rather pessimistic in a bear market. The common factors involve recession, high unemployment, more capital outflows, and fear among investors.

There are 2 types of bull markets. Let’s have a look at them now:

• Cyclical Bull Market: The economies experience 4 phases of economic cycles in the short to medium-term, including expansion, peak, contraction, and trough. An extended run during the recovery or expansion phase is called the cyclical bull market.
• Secular Bull Market: Unlike short-term trends, when the stock market remains in an uptrend in the long term, preferably over a decade, it is called a secular bull market. Usually, the reasons for such an extended period of growth are innovation, productivity, political stability, macroeconomic decisions, etc.

Key Characteristics and Signs of a Bull Market

As an investor, your concern should be about identifying the signs of a bull market in advance. This can help you develop winning investment strategies. So, here are the characteristics you can recognize as having a connection with the bull markets:

• Rising Stock Prices: When you see a steady and consistent upward trend over months or years.
• High Investor Confidence: Investor sentiments drive the stock prices, and when investors are highly confident, there is bound to be positive sentiment. It can drive an extended bull market rally.
• Strong Consumer Spending: When the disposable income of the people rises, they can afford more goods and services. This increased economic activity drives economic growth, and the stock markets respond positively.
• Low Unemployment: If companies thrive in an economy and make enough profits, they are bound to upscale and create more jobs. It can help raise the income levels and lower the rate of unemployment.
• Rising GDP: Higher GDP means more investment and growth. It can indicate positive signs for the economy, which can reflect as a bull market.
• Increased Corporate Profits: When the profits of listed companies rise, their valuations increase. This boosts the uptrend in stock markets.
• Positive Media Sentiment: Investor sentiments are often related to the headlines in focus. If the focus is on positive news like economic growth, new highs, successful IPO listings, etc, it can boost the bull market.

Read More – Where Should You Invest If You Missed the Bull Run in the Indian Stock Market?

Bull Market vs. Bear Market

Key Signs that a Bull Market is Underway

What are the stock market trends that suggest a bull market? Let’s find out in this section:

How can Investors Benefit from a Bull Market?

A bull market presents several opportunities for long-term investing. However, it is important to follow the right approach to become successful. Here’s what you can do in such situations:

• Stay Invested: In the long term, if you want to grow your wealth, you have to remain invested in the stock markets. It is better to hold your stocks during an economic growth cycle, which translates into the bull market.
• Use Rupee-Cost Averaging: When the markets are stable and in a bullish trend, it is the best time to make fixed investments regularly, just like you invest in SIPs in Mutual Funds. It can help in accumulating wealth and averaging out your costs.
• Focus on long-term goals: The best part about stock market trends is that you can hold your stock in the long term without going through the hassle of making quick trading decisions. A bull market can supercharge your investment outcomes.
• Diversify your Portfolio: Distribute your capital and invest in various high-performing sectors instead of putting all your money in one sector only. For example, you can invest simultaneously in IT, healthcare, renewable energy, FMCG, and the auto industries.
• Avoid Emotional Trading: Don’t make hasty decisions driven by emotions like fear of missing out (FOMO).

Risks and Mistakes to Avoid in a Bull Market

While a bull market sounds exciting and all, it is not without its risks. Here are some common pitfalls you should avoid while riding the strong stock market trends in a bullish market:

• Overexposure to Risky Assets: Putting all your money in high-risk, high-growth stocks can lead to erosion of wealth. Don’t overexpose your savings to such risky stocks.
• Failing to Lock in Profits: Long-term investing requires you to monitor your portfolio regularly and rebalance your holdings. Book profits where available and diversify your investments.
• Ignoring Market Bubbles: When the market valuations are high but there are no strong company fundamentals to back such valuations, it means the prices are exaggerated and there is a market bubble. Never buy such a stock.
• Chasing Hype Stocks: Do your due diligence before buying a stock. Don’t believe in trending stock suggestions or hearsay. Chasing hyped stocks will only lead to losses.
• Lack of a strategy: Instead of picking a stock randomly, use a defined investment strategy.
• Use Trailing Stop Loss: A trailing stop loss provides a safety net for your profits. The trailing stop loss keeps moving up with the increase in stock prices. In the event of an unexpected downturn, your trailing stop loss is hit, and you can safeguard your profits.

How to Prepare for the End of a Bull Market?

Now this is very important. Most investors are able to spot the beginning of a bull market but get stuck at the very end. It is inevitable that the uptrend will end. So, how can you be prepared in advance to deal with it? Let’s understand:

• Economic Indicators: Watch out for a change in the economic indicators, like growth slowdown, rising inflation, interest rate hikes, etc.
• Maintain a Balanced Portfolio: Mix up your investments by including equity, bonds, FDs, Gold, etc. 
• Use a Trailing Stop Loss: If the prices fall below a threshold, your trailing stop loss can protect your profits from eroding. It acts as a safety net against a sudden downturn from the bull market.
• Keep Cash Reserves: If you don’t want to sell, have liquidity to meet your expenses, and average out your cost in a bear market.
• Control Emotions: Don’t make panic sales, as there can be small hiccups in a broader trend of a bull market.

Final Thoughts: Building Wealth Through Market Cycles

If your goal is long-term investing and growing your wealth through stock investments, a bull market can supercharge your plans. Unlike short-term trading, where timing is everything, in the long run, planning is more important than timing. Understanding the broader trend and making the right decisions can support your investment strategies. Investing smartly means not chasing the trends and making resilient investment portfolios that can stand the test of time. Instead, you should maintain your positions in a disciplined manner across all stock market trends and see the magic happen.