A bull market describes a stock market when the average share price increases over an extended period causing the market indexes to rise.
Expectations of future profits drive stock prices. Assume a growing economy has increased consumer demand, and companies are expanding to keep pace. Employment is rising. People feel confident and purchase items they have put off, such as a new house or car. Investment analysts expect corporate profits will increase because the future is bright. Stock prices are rising, and few expect the trend to end soon. This scenario describes a bull market because of the extended period of rising stock prices.
Stock prices are rising because buyers outnumber sellers, and the demand for stocks is increasing. Optimism spurred by optimistic global outlooks or encouraging national economic news prevails.
Future expectations also impact sellers (the supply curve). Disappointing economic news or anticipated legislation that would increase manufacturing costs may reduce expected profits for certain companies. Sellers may choose to sell before the law goes into effect. The inability of Congress to reach an agreement regarding scheduled tax increases and cuts in government spending in December 2012 caused great concern and prompted many investors to sell, which created a bear market. A bear market occurs when pessimists rule. During a bear market, most prices on the stock market fall because more investors are interested in selling than buying. This results in falling share prices over an extended period. Bear markets are illustrated by a rightward shift in the supply curve because more shares are available for sale at every price, which decreases the market indices.
A simple way to remember the terms bull and bear markets is to think of how bulls and bears fight. A bull thrusts upward with its horns, while a bear swipes downward with its paws.
It is important to note that the price of a specific stock may fall during a bull market or rise in a bear market, so it is still essential to acquire stocks for sound financial reasons. Also, a one-week price increase due to encouraging news does not constitute a bull market. Nor does a short-term drop in prices during a bull market mean a bull market has ended.
