Investing 101
Published ago 30 días
A bull market is an upward trend in financial markets, particularly in U.S. stocks. You may have heard of Bull Market or Bear Market before but might not understand why they are named that way and what the difference is between them. In this article, we will explain in simple terms what a bull market is, how it differs from a bear market, and what you should consider when investing during such a period.
What is a Bull Market?
Since the 18th century, investors have used the term "bull market" to describe rising stock prices. It is a period when the prices of stocks, cryptocurrencies, ETFs, and other financial assets constantly rise (for months or even years).
The name bull, prominent in the stock market, comes from the way this animal attacks: moving its horns from down to up. Therefore, a bull market is a market with an upward trend, characterized by optimism and confidence that the market will show positive results in the medium and long term.
This symbol is so celebrated that there is a statue of a bull near Wall Street in New York City.
The generally accepted definition of a bull market is that it occurs when stock prices rise by more than 20% from recent lows, lasting an average of about 4 years. Some investors apply strategies like “buy and hold” to make money during these periods.
The opposite of a bull market is a bear market, where prices have a downward trend.
What Causes a Bull Market and How to Identify It?
Bull markets generally occur when the economy is strengthening or already showing signs of strength. This involves high economic growth, low unemployment, controlled inflation, and high corporate profits. There is also confidence among investors, as well as higher trading volumes and liquidity, leading to high demand for stocks in the market, and there is a greater frequency of IPOs.
To identify a bull market, investors typically look for a 20% or more increase in stock prices from recent lows.
What Have Been the Bull Markets Since the Beginning of the 21st Century?
Bull markets are unpredictable and are usually recognized after they have already occurred. Since 1877, there have been a total of 26 bull markets, with an average duration of 42 months (considering the S&P 500) and an average increase of 87% during that period. It is important to note that bull markets do not only occur when the economy is at its best; they also emerge during economic recoveries.
For example, from 2009, the market entered a bull period that lasted until February 2020 with the arrival of COVID-19, making it the longest in history, with growth of over 300%. This was driven by strong earnings growth, low-interest rates, and investor optimism.
As of May 2024, we are in a bull market that began in October 2022, with a 48% return during this period.
Practical Tips for Investing During a Bull Market
One of the most basic strategies to benefit from a bull market is to buy for the long term and not sell until the gains are significant. Investor optimism drives the market up and favors the effectiveness of this strategy.
Additionally, dividend-paying companies often increase their dividends, which can be attractive to defensive or conservative investors. Moreover, it is important to note that stocks in a bull market have higher valuations, as investors tend to pay more for growth potential. Therefore, it is essential to invest with caution.
Lastly, with these rises, it is important to rebalance your portfolio to stay diversified. This reduces the risk of your portfolio and favors long-term returns if the bull market ends. Maintaining investment principles like these is better than trying to predict the market's direction. As Ken Fisher, a famous American investor, said, "Staying in the market is better than trying to predict the market."
Conclusion
A bull market is an upward-trending market where the stocks of the major indices have risen by more than 20%. These often occur due to the strength of the American economy and the innovation of its companies. To benefit from this growth in the long term, all you need is to have an account with a broker and start investing. The best option for Latin America is Hapi, as it is regulated, with personalized funding methods for the region and fractional shares. What are you waiting for to start your journey towards financial freedom?
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