Bull Markets

Courtesy of Marcy Hargan - flickrInvesting is an exciting venture, but also probably a little scary and confusing. There are several aspects that go into investing that you may not fully understand. Numbers, percentages and a slew of words will be thrown around and it’s easy to get lost in the whirlwind.

No worries, we are here to help you navigate the investment scene and break it down for you. For now, let’s focus on bull markets. 

Bull – like the animal?

Exactly. The technical definition for a bull market is when a market’s share prices are rising and therefore encouraging the buying of stocks. A bull market is met with optimism, investor confidence and an expectation for relatively strong and positive results.

The name comes from the animal and how they approach their opponents. When bulls attack they thrust their horns upwards. This is a metaphor for the status and movement of the stock market. In an expected bull market situation it is anticipated that prices will shift upwards much like the horns of an attacking bull.

Helpful Tools

The key component to successfully navigating a bull market is to take advantage of the upward swing of prices as early as possible before the prices get too high. Here are a couple of tools to utilize in order to predict these trends and what to do in preparation for it.

  1. Long Positions

A long position is what you should watch for in order to predict whether or not a bull market could occur. If you think that a bull market situation is about to hit, your best bet is going to be to buy the stock at a lower price and hold onto that stock until you can sell it at a higher price.

One way to approach the situation is to buy the stock and simply hold onto it until you believe the market is topping out and then selling that stock to turn a profit. This is the safest option. If you are looking to increase your profits and be more aggressive among the market, you can consider doing an increasing buy and hold. This means that you purchase the stock at the lower price and still hold onto it, but purchase more shares as the stock market price increases. This way, you are obtaining more shares to sell at a higher price.

  1. Call Option

A call option is an opportunity for you to leverage your capital for a greater return on your investment. It allows you to speculate with stocks that you don’t necessarily own.

What does it mean? If you are anticipating that a price will rise, purchase the call option to a stock by entering into a contract. This will have you paying a set premium price within a certain amount of time. If the stock market price rises over the course of your predetermined time period, you can purchase the shares at the lower price established at the time you enter into the contract. Therefore, you are purchasing the shares at a lower price with the security of being able to turn around and sell them at a higher price. The downfall, however, is that if the stock market does not increase, you will lose out on the amount you paid for the premium.

Call options are a relatively simple and beginner way to go about predicting stock market trends and experimenting with your own investments.

How To Spot a Bull Market

To take full advantage of a bull market situation you want to try to spot it when the market is either topping or bottoming out. Here are two ways to assist you in determining a potential bull market:

  1. Advance/Decline Line

The advance/decline line is created using the following equation: number of advancing stocks divided by the number of declining stocks. If this number is greater than zero then it can be predicted that a bull market may occur. A rising line means that the market is moving higher and it is a relatively safe bet to proceed as if a bull market is about to hit. 

  1. Price Dividend Ratio

This ratio compares stocks’ share price with the dividend paid out in the last year. Another equation: current stock price divided by last year’s dividend payout. If the ratio is declining then it is indicating an attractive bargain and potential bull market.

That is a quick snapshot of a bull market – what it is, what tools to utilize for it, and how to spot it. Bull markets are a good aspect of investing so it’s helpful to stay informed and prepared.