A bull market or a bull run refers to a stock market characterized by a sustained rise in share prices. This occurs when investors believe the positive trend will continue for the long term. Such optimism is usually based on strong positive indicators for a country's economy, including high employment levels. The opposite of a bull market is a bear market, in which share prices decline. This usually happens when investors believe the economy will slow down and unemployment will rise.
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Origins of the Term
The origins of the term are not entirely clear, but the Investopedia website claims that both bull and bear markets are named after the way in which each animal attacks. The bull will typically drive its horns up into the air, while a bear will swipe its pawns downward upon its prey. The investment news website Qwoter says the term "bull" came into usage in the early 18th century when it referred to a speculative purchase of a stock on the expectation that it would rise.
Causes of a Bull Market
When the economy is strong, more people have more money and are willing to spend it. This drives share prices up, because demand is then stronger than supply. However, investor psychology also plays an important part in determining which way the market will go. Investors try to predict whether stocks will go up or down in value, and they very often follow what others are doing. That way they create a "herd" mentality, which can drive stock prices up or down, even against economic indicators.
When Does a Bull Become a Bear?
If a stock goes up in value from the previous day, that does not necessarily mean a bull market. For a market to be characterized as bull, the change in stock prices has to occur over a longer period. Another important indicator is the degree of the change. Most definitions say a bull market is characterized by a rise of 15 to 20 percent over at least two months. Similarly, a decline of the same degree over the same period of time is known as bear market.
How to Take Advantage of a Bull Market
Investopedia advises investors to take advantage of rising prices by buying early in the trend and then selling when stocks have reached their peak or have come close to reaching it. Of course, knowing exactly when stocks are at the bottom or the peak is impossible, but closely following market reports and other indicators, as well as gut feelings, can help investors make good guesses.
Beware of the Bull Trap
When a stock goes up in value, many investors will want to buy it, hoping to sell it later, when it is even more expensive, and make a profit. This sudden surge in demand for stock will occasionally bring a sudden surge in supply, pushing the price down. Holders of recently acquired stock can end up with losses. This is known as a bull trap.