Investing in the stock markets is a continuous process. While investing in the stock market, you should be looking at growing capital from the up-trending market, hedging your portfolio against losses and utilising the periods of volatility in the markets to your benefit. Opportunities for growth are there in both bull and bear markets. Both the market cycles are fraught with risks as well. However, making decisions under risk and uncertainty is the essence of equity investing. Decision making requires discipline, consistency and focus. An investor with these qualities will utilise the opportunities that the bull market presents and prosper.
What is a bull market?
A bull market is characterised by a rise in prices over a while. Generally associated with an increase in equity prices, a bull run can extend to other investments such as realty.
How to invest in bull markets:
Bull markets provide ample opportunity for wealth creation. It is the ideal time to take advantage of rising prices by buying stocks earlier and selling them at higher rates. Losses in a bull run are minor, and the investor has a greater probability of earning returns. Some of the ways to profit in a bull market are as follows:
Evaluate personal goals – Assessing your own goals is the first move to making informed decisions. A personal evaluation will take into consideration your age and other factors that influence your investments. For example, the risk-taking capability of a 30-year-old will be different from a 60-year-old person. Hence their choice of equity will also vary.
Long positions – Taking long positions with your stock means to buy them at a lower price and sell them when the price rises. The stock is purchased under the anticipation that the price will increase.
Buy companies with strong fundamentals – Invest in companies with a history of growth. Check the demand for the product that the company makes, its sales and earnings.
Exercise call options – In a call option, the investor can buy a stock at a particular price called the strike price at a specified date. When the stock prices move beyond the strike price, the investor has the option of buying the stock at the lower strike price and then selling it in the open market at a higher price, thereby making a profit.
Buy fallen stocks – Before the bull run, the bear market presents the opportunity to buy stocks at a price near their book value. You can purchase shares of companies with good growth at a lower price in this phase.
Diversify your portfolio – Before you start adding stocks to your portfolio analyse your situation and diversify not just in stocks but also in non-equity products such as bonds and bank savings.
Choose different stock classes – Small-cap stocks have the capability of phenomenal growth but are commensurate with greater risk. A large-cap stock is a known market leader. Your portfolio should comprise different stock class and not focus on one.
Choose various industries – Certain industries will bounce back when the economy flourishes, and people start to spend again. Cyclical stocks such as housing, automobile, technology industry and industrial equipment are likely to gain from growth in the economy.
Avoid making mistakes:
Every investor should try to avoid making the following mistakes in a bull market:
Experimenting with trading strategies – Trading is different from investing as trading generates profits over a short period, while investments create wealth over a longer period. Trading requires experience and expertise and should be avoided by retail investors.
Timings the market – Predicting markets is difficult. Yet most people try to time the market to buy at cheaper rates and sell at higher ones. Even top traders advice against such strategies.
Follow the herd – In a bull run, most people invest in mid and small-cap scrips that are not backed by strong fundamentals. It is advisable to invest in mid-cap mutual funds in a bull run.
The stock market posts positive returns in the long term. However, if you are looking to make the maximum out of a bull market, it is necessary to take some time before making an investment decision.