What is a bull market?

Discover how a bull market works and how to use it to your advantage when investing.

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Many investors love a bull market. It’s a time when stock prices are charging ahead and investor confidence is riding high. But exactly what is a bull market and is it a good time to invest?

In this guide, we explain some key information about bull markets. We also answer common questions such as “how long does a bull market last?” and “what are the phases of a bull market?”

What is a bull market?

A bull market is a long period of rising prices in the financial markets. Rising prices mainly affect stocks, but can also include other financial assets like bonds, property and commodities. Sometimes, rising prices can last for months or even years.

Even during bull markets, stock prices will move up and down, sometimes significantly. However, during a bull market, there is an overall trend of rising share prices and any dips are short term and not severe. Investors are generally optimistic and there is a feeling that upward prices will last for a while. In reality, stock prices are extremely hard to predict and it’s always possible that a stock market crash and a bear market are around the corner.

What are the characteristics of a bull market?

Here are some of the commonly accepted characteristics of a bull market:

  • There is a long-term trend of rising prices for financial assets, including stocks.
  • Stock prices rise by at least 20%, usually after a drop of at least 20%.
  • There may still be some short-term slight dips, but these will be less than 20% and occur for less than 2 months.

What makes stock prices rise in a bull market?

The following are some of the underlying conditions that may contribute to a bull market:

  • Strong economy. There is a rise in corporate profits across the whole country and GDP is increasing. This is a measure of the total market value of goods and services produced within a country.
  • Fall in unemployment. This is a good indication of a strong economy.
  • Low interest rates and low corporate tax. These may also contribute to a bull market as they lead to greater corporate profits.
  • Strong investor demand. Investors are willing to take a risk and invest in stocks.

How long does a bull market last?

According to market research by InvesTech, the average bull market lasts 3.8 years. That’s the average time taken for the stock market to climb from the bottom to its market peak.

The longest bull market on record was 11 years (between 2009 and 2020). That run finally ended with the COVID-19 crisis as equity prices plunged. On 16 March, the Dow dropped 12.9% in one day and the New York Stock Exchange suspended trading several times during that time.

What are the phases of a bull market?

Experts have identified 4 phases that occur during a bull market:

  • Reluctance phase: This first phase follows after a bear market, where stock prices dropped significantly. Investors are still cautious even though stock prices are low. Experienced and institutional investors may start to buy up shares to take advantage of the low prices.
  • Digestion phase: Individual investors start buying stocks as confidence returns to the market. Stock prices start to increase and so more investors start to buy, fuelling demand and raising prices.
  • Acceptance phase: Stock prices gallop away as new investors enter the market. Many companies issue more shares and new companies list on the stock exchange using an IPO. Institutional investors may sell their shares to bank their profits.
  • Exuberance phase: This is a period of high price volatility and high stock-trading volume. Prices are driven higher than the underlying investments are worth. Eventually, prices rise to the point where investors realise they are overpriced. This is when the tide starts to turn and prices begin to drop.

Can you predict a bull market?

It’s hard to predict a bull market, but it’s easy to spot one looking back. To quote the American filmmaker, Billy Wilder, “Hindsight is always twenty-twenty.”

Still, sometimes there are signs that the stock market may be getting near the top of its growth cycle. For example, one possible sign is when there has been a long period of stock price growth but many experts believe that stocks are overpriced compared to the underlying performance of the companies.

Can you make money in a bull market?

It’s possible to make money in a bull market if you’re a long-term investor. That’s because if you sit tight and hold onto your investments for a long time, they are likely to rise in value over the long term. You’ll have time to wait out the ups and downs of the stock market and benefit from the long-term trend of rising stock prices.

Short-term traders can also make money, but it’s much riskier than long-term investments. Here are some investor strategies:

  • Buy and hold: This is a potential strategy for private investors as well as traders. It simply involves owning a stock for a long period and selling it at a later date.
  • Increased buy and hold: This is a more risky variation on the buy and hold strategy. An investor using this strategy will add to their holding each time the stock increases in price.
  • Retracement: This is where investors buy stocks when the price dips. Short-term price dips take place even during a bull market.
  • Full swing trading: This involves more aggressive trading strategies like short-selling. Short-selling is when traders take out a financial instrument that will make them money if the stock prices drop in value.

How should long-term investors view a bull market?

Zoe Stabler

Finder expert Zoe Stabler answers

Just like a roller coaster, the climb up in stock market prices is often long and slow, whereas the descent is often quick and slightly scary. But if you’re a long-term investor, that shouldn’t put you off. If you invest regularly, then you’ll sometimes buy when prices are low and sometimes when prices are high.

I’m a big believer in long-term investing. Bull market, or bear market, if historic performance is anything to go by, you’re likely to make money in the long run. That’s because stock prices tend to consistently outperform bonds and cash over longer periods.

Bottom line

A bull market is a long period of optimism in the stock market. It’s when share prices are climbing or staying steady. Bull markets last for an average of around 4 years, whereas bear markets, when stock prices drop, tend to be shorter lived.

For long-term investors, bull markets are a time to stay steady with your investing. If you pile money into the stock market when prices are high, then you could be buying just as prices reach their peak. In contrast, if you drip money in gradually, you’ll buy stocks when prices are low, high and everywhere in between.

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