What Is a Bull Market?
It is one which is rising or expected to rise.
What is a bull market? When referring to the stock market, it is one which is rising or expected to rise. The term is also used in relation to other financial markets such as the bond market.
It is easy to distinguish bull markets from the opposite type of market, namely bear markets, as the terms relate to how bulls and bears attack their adversaries.
Bulls attempt to throw their adversaries up and bears attempt to claw them down.
How Do Bull Markets Develop?
Bear markets tend to develop when the economy is expected to improve or is improving, and when company profits are growing.
This provides a degree of optimism to investors who tend to become over exuberant as the bull market develops. As a result, price earnings ratios rise above historical levels as investors are prepared to pay more for company earnings.
However the last bull market was characterized more by easy credit and low interest rates. Companies were attracted to this credit likes bees to a honey shop giving rise to, in some cases, large debt to equity ratios.
When credit cut off some companies failed as a result of excessive debt. This had a ripple effect throughout the global economy as confidence in the financial markets evaporated.
Some Terms Associated With Bull Markets
A stock market bull is a term used to describe commentators who are optimists and are predicting that the market will rise further.
A secular bull market indicates a market that is in an uptrend over many years but that may have smaller bear markets embedded in it.
How Do Bull Markets End?
The end point of a bull market is usually characterized by a stock market bubble with many share prices overvalued.
Momentum stock trading becomes more common towards the market top.
Buyers assume that the market will keep rising and that they will be able to offload their shares at a higher price to a greater fool.
The end of bull markets is usually swift with share prices dropping rapidly compared to the slower climb in the earlier phase of the bull market.
Companies with too much debt can be and have been wiped out on these occasions. Individual investors who take on too much debt through margin loans are also placed in financial difficulty when banks call back loans, having to sell of shares at a lower price to pay off the loan.
Some investors try to protect their profits by putting in place trailing stop loss orders which automatically trigger a sale of their stock at a designated percentage drop below the highest price reached on their stock.
The combination of stop loss selling and selling to pay off portfolio loans helps to explain why bull markets end so quickly.
The discussion above provides some answers to the question 'what is a bull market?' Stock market investors need to be aware when a bull market is playing out. But they can go on for many years.
However, the signs when the endpoint is approaching is usually fairly clear, with historically high P/E ratios, over exuberance and people declaring that this time it will be different..
Value investors can observe the signs through a diminishing number of stocks that offer value.
They are in a better position to avoid catastrophe through part selling.
It is better to get out a year or two early, rather than seeing your stock portfolio reduce by upwards of 50%!
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