A market cycle is a short or long-term duration of events that involves changes in the patterns of the stock market which are caused by changes in all the related business cycles. A market cycle can be referred to as the period between specific market events like ups or downs. This period can be different for each different entity. It can range from a few minutes to a few years, depending on the analysis or the study being conducted. Each business responds differently within a particular market cycle. And any change such as political, demographical, etc. happening within the economy can affect these market cycles significantly.
The stock market cycle can be divided into four different phases.
Phase 1: Accumulation
This phase of the stock market cycle usually comes after a markdown stage and before the markup stage. This phase can apply to any individual investor or an investment firm or the whole market. During this phase, the shares usually trend at their face values without many fluctuations in the price, encouraging all the traders and smaller investors to accumulate them by buying them in one go or batches. The institutional buyers of the stocks buy them in phases, as they can avoid driving the price of the stocks up and losing the chance of buying at a cheaper price.
Phase 2: Markup
This is the second stage of the stock market cycle wherein the price of the stocks begins to grow higher continuously. The stock prices reach beyond the control which existed during the accumulation phase. This is the perfect time to earn profit from your investments. The investors and traders should start taking the benefit of this situation as the duration of the phase are uncertain, and waiting too long to sell out your investments can earn you a loss. This phase remains fruitful for the seasonal investors and any dip in the price is rather accounted as the chance for buying more shares.
Phase 3: Distribution
This is the phase of the stock market cycle where the shares that were bought during the accumulation phase are being sold off consistently over a period. The prices are not getting high and are stagnant. The market is proceeding towards the markdown stage. This time is not ideal for smaller and individual investors as the market is more volatile and uncertain. Most of the buyers are exiting the market cycle during this phase.
Phase 4: Markdown
This is the last phase of the stock market cycle. All the retailers and institutional investors try to avoid this phase. Traders who got into the market cycle during the distribution phase will face the highest volatility and try to come out of the price reductions and save their investments. There is no demand for the stocks and hence the price of stocks will reduce. It is important to get out of the market before this stage commences otherwise the panic among the stakeholders will encourage more and more selling of the shares, which makes the market more volatile.
For all new or experienced investors, be it institutional or individual traders, it is important to learn these four stages of the stock market. A study regarding the past trends of various stocks at different time frames will be helpful while investing in the desired stocks and making higher returns during this favorite time of the stock market cycle.