Bull Market Definition – Explanation & Trading Examples
The bulls are loose: The bull market on the stock exchange – definition
The processes on the stock exchange are often explained with metaphors or figurative language. The term “bull market” has become established as a catchword for a sustained upward trend in the securities markets. Although the French word “bull market” is sometimes used, “bull market” for rising prices and “bear market” for falling stocks are more common terms among investors. In this article, I’ll take a look with you at what happens on the stock market when the “bulls” are loose.
Bulls and bears always meet on the stock market.
When is there a bull market?
Basically, we speak of a bull market when the prices of shares Prices of shares have risen steadily over a longer period of time. It does not matter whether the securities of an entire country or “only” one industry have risen. This trend is often the result of an overall economic upswing. The rise is accompanied by high – sometimes exaggerated – profit expectations and thus triggers euphoria on the Stock exchanges stock markets. This attracts even more investors to the securities market. This momentum additionally fuels the bull market, true to the old stock market rule “The bull market feeds the bull market.” Thus, a bull market can last for a very long time, regardless of external factors.
How do you recognize a bull market?
There is no standard definition of when a bull market exists. The U.S. Securities and Exchange Commission calls it a bull market when prices are rising and the mood on the stock market is optimistic. A price increase of more than 20% in two months in an entire market is a clear indication of a bull market. At the same time, other positive effects are also evident, such as a falling unemployment rate. The general “mood of optimism” and the fresh capital for companies (through increasing share purchases) allow them to expand and hire new employees. A bull market often takes place when the Central banks have lowered key interest rates accordingly. Companies can then borrow very cheaply and further expand their business model. However, investors receive almost no interest on conservative investments such as checking or call money accounts and therefore seek more lucrative investment opportunities such as the stock market.
Examples of bull markets
There are several examples of long-lasting bull markets. Between 2002 and 2007, there was a real run on real estate in the United States. This culminated in a global financial and economic crisis in 2008. The longest bull market also occurred between 2009 and 2020. Here, bullish investors ruled the stock market for a full eleven years. During this time, for example, the American index S&P 500 increased by 400%. The Corona pandemic put the brakes on the bulls and gave investors a full, albeit short, bear market.
The Bull Trap
The so-called bull trap is a misinterpreted buy signal in the price development of a stock. Especially in the case of a stock that has fallen sharply but is now initiating a countermovement (“bear market rally”), many private investors “bet” on a Trend reversal and buy the security. However, if this is only a short-term recovery, they have fallen into the bull trap and sell their shares in panic to prevent further losses. It is therefore advisable Always make stock market purchase decisions on the basis of fundamental key figures and an extensive analysis of the company.
Comparison of bull and bear markets
The opposite of a bull market is the so-called Bear markett. Once the bears have taken over the stock market, the mood is one of doom. The Prices fall sharply and sustainably, leading to panic andthis leads to panic and irrational actions. This can also affect individual sectors or the entire market. Here, too, there is no uniform definition, but a sustained decline of 20% clearly indicates a bear market.
But where do these two metaphors come from? The bull is considered a symbol of optimism. When it attacks an opponent, it pushes it up from below with its powerful horns. Stock prices do the same in a bull market. A bear, on the other hand, attacks another animal by striking with its paws from the top down. So just as powerfully as a bear lashes out with its paw, stock prices plummet. According to legend, this metaphor goes back to the 17th century, when a bull and a bear were said to have engaged in exhibition fights near the London Stock Exchange. The animals’ behavior evolved into the winged words we still use today.
Conclusion: a helpful metaphor, but nothing more
The rules on the stock exchange can be very confusing. So it’s all the better if figurative language helps us to help us to better understand what is going on in the securities market. The linguistic images of the bull or bear market are easy to understand and even newcomers to the stock market can quickly explain what it is all about. It becomes problematic when Beginners on the securities market want to capitalize on these developments and buy shares without thinking. In principle, one should examine each security carefully before adding it to one’s Portfolio put it in your portfolio. If you follow the so-called “buy and hold” strategy, bear and bull markets play only a secondary role anyway. While you can make acquisitions in high-quality companies in a bear market, an overheated bull market offers the opportunity to take profits. Possible losses are likely to be offset if the holding period is more than 20 years. So bull and bear markets are part of the basic knowledge of the stock market, but there’s not much more to it than that.