What is Bull market?
Bull market can be described as when prices of stocks listed in the stock exchange rise consistently for a period of time. The period may last for months or years. Before a market can be described as a bull market, it is expected that the prices of nothing less than eighty per cent of the stocks listed in the particular exchange should be on the rise. As a result of the rise in prices of most of the stocks in the market, this is expected to force the market index to rise too. The extent to which the market index should rise before one can say there is a bull market is somehow subjective. There have been different opinions on this. While some says that a rise of at least fifteen per cent in market index is enough to describe a market as bullish, others says it should be at least twenty per cent. Nevertheless, what is common to any bull market is the rise in investors’ confidence in the market.
Factors Affecting Bull Market
Besides the rise in investors’ confidence as a common characteristic in any bull market, there are other factors which can make the stock prices to be on the increase. These factors are discussed below:
Employment: Any time there is a sharp decline in the level of unemployment in a country; the standard of living of the citizens tends to improve. There will be more disposable income. When there is enough disposable income, people start increasing their investments. Whether people are investing in stocks directly or in mutual funds, some of the money will find their ways to the stock market by one way or the other. Remember that both mutual funds and pension companies are institutional investors. Their actions or reactions impact on the stock market.
Boom: Any time a country records strong growth in its Gross Domestic Products, it indicates that the economy is good. This usually increases inflow of foreign investments. Foreign investors will be attracted to invest in the economy. Not all investors are willing to establish new companies but some of them are willing to invest into existing companies. One of the ways they achieve this is by buying the stocks of the company of their interest from the stock market.
Companies’ Results: If the results being released by different companies show great improvements over the previous period, investors may anticipate robust dividends. This may make some of them to quickly take position so that they can enjoy dividend income.
Law of demand and supply: I can say that this is the resulting effect of all the points I mentioned above. When demand is higher than supply, stock prices will continue to rise. This brings about bull market.
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Investors’ Reactions to Bull Market
In stock market, investors react differently to situations. The way an investor reacts to events or information will ultimately determine whether he will make profits or not. In a bull market, people may think that all investors will make money from the stock market. Unfortunately, things don’t happen that way. Let’s see the different reactions exhibited by investors during bull market.
Buy: Some investors believe that bull market is the right time to buy stocks. The basis for their action is that, they believe that it is dangerous to buy stocks when prices are down as no one can truly know when the price has reached the bottom. So, they wait till the time stock prices have started to increase before they buy. However, investors buy stocks for various reasons. Some buy to hold while speculators buy to sell. Of course, the prices at which one buys and sells stocks determine how much loss or gain he will make. Some speculators will be fortunate to sell at the right time. Some will not sell on time expecting that the prices will continue to rise. Unfortunately, the prices reach a plateau and start trending downward. If care is not taken, they may end up selling at a loss. For people that buy to hold, they may lose some of the gains they would have recorded back to the market because they refuse to sell when the price is high. However, in the long run, they may make good profits. The people that make profit through this buy and hold strategy usually ensure that they only invest in companies with good fundamentals.
Sell: Bull market is the period for some people to sell their stocks. This category of investors must have bought their stocks when prices were low. They must have entered the market when other people were selling. This would help them to buy stocks at very cheap prices. In the same vein, the price at which they sell the stocks will determine the level of the profits they make. Fear may prevent some to maximize their gains while greed may make some to lose part of their profits back to the market.
Do nothing: There are people will sit on the fence. Some may like to invest but for the lack of money. Some might think that they have missed the right time to invest as the prices continue to grow. Their fear will be that the price may soon correct itself. So, they keep watching until the opportunity passes them. I forgot to mention that some investors (let me call them speculators) may decide to borrow money for margin trading with the hold to sell at profits. This may work out for some. But this strategy is very risky. If you borrow money to trade and you eventually record a loss, you may find it difficult repaying the loans. Unfortunately, the interest will start to accrue on the loan immediately you borrow the money. Personally, based on my risk tolerance, I don’t like margin trading.
So, what is the best thing to do in a bull market? There is no specific answer to this question. Your investment goals, strategies and risk tolerance will play vital roles in deciding what you should do.