What Is A Bull Market?Summary: What is a bull market and how can you identify one? This page explains what happens in a bull market and how to make stock market profits. To many people, especially those in the media that need a headline, any period of a few stock market sessions where prices rise is a bull market or at least has the potential to be one. This, however, is not the case. There is most certainly a difference between a few sessions of gains and a period of genuine economic expansion during the business cycle . It needs to be highlighted that the normal business cycle of a national economy is not a fast moving thing. Therefore, once in a period of growth, it is very likely that the growth will be maintained (at differing rates each month and quarter) for long periods of time. In simple terms, economic growth leads to greater production of goods and delivery of services. These goods and services require the spending of money in multiple parts of the economy. That spending helps companies to earn more and (hopefully) generate and retain profits.
As more people invest, supply of company assets will tighten and prices will rise. As this happens to many firms, the entire stock market will rise. These rises bring in more investors and money and so the market continues to rise in price. It becomes self-fulfilling. The upwards market trend brings in ever more investor money! There are undoubtedly many factors that can help to create a bull market, for example fiscal and monetary policy, or the spillover from a neighbouring economy (it often is the case that as one national economy rises and falls, it's nearest trading partners economies expand or contract as well). However, a few factors really stand out at a basic level for the promotion of bull markets, and they are the most important - but often overlooked - characteristics. Peace (war usually devastates an economy), genuine democracy and full property rights for the ownership of assets. In the 'West', we often overlook these factors because we take them for granted, but in many other countries, especially in Africa, the lack of these basics holds national economies back and prevents any real period of sustained economic growth. These can be considered as the basic requirements for capitalism to flourish and without them, economic expansion will be patchy at best.
The period of expansion will almost always lead from sensible investment to wild speculation. As this happens, valuations become less and less sensible and more risk is assumed by each new investor. The professionals will be selling into a strong market while the unaware average investor is taking much larger risks for much lower potential gains by 'getting in at the top'. This period of 'top' (also often referred to as 'frothy') may last for months or even years. And during this time, people will be making money and having a great time. This period of wealth may grace the entire economy or perhaps just certain sectors (residential property for example). It may grow into what we now might describe as a bubble. If you hear these words often, it is time to sell! Of course, nothing lasts forever. A bull market worthy of the name can last for years, but sooner or later, these things end. When that happens, and investors are frightened, the bull may turn into a bear with incredible speed and ferocity. Bubbles always burst! To read more about stock market conditions, please follow these links:
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