Market Cycle
Long term price patterns or the price movements over a long period of time that move along with general business cycles are known as market cycles. These cycles are based on past price pattern of the stocks. Further, these price patterns are very useful for carrying out technical analysis which is an observation of price patterns on charts.
Stock market cycles are proposed patterns that proponents argue may exist in stock markets. Many such cycles have been proposed, such as tying stock market changes to political leadership, or fluctuations in commodity prices. Some stock market patterns are universally recognized (e.g., rotations between dominance of value investing or growth stocks). However, many academics and professional investors are skeptical of any theory claiming to precisely identify or predict stock market cycles. Some sources argue identifying any such patterns as a “cycle” is a misnomer, because of their non-cyclical nature.
Changes in stock returns are primarily determined by external factors such as the U.S. monetary policy, the economy, inflation, exchange rates, and socioeconomic conditions (e.g., the 2020-2021 coronavirus pandemic).[2] Intellectual capital does not affect a company stock’s current earnings. Intellectual capital contributes to a stock’s return growth. Economist Milton Friedman believed that for the most part, excluding very large supply shocks, business declines are more of a monetary phenomenon. Despite the often-applied term cycles, the fluctuations in business economic activity do not exhibit uniform or predictable periodicity.
According to standard theory, a decrease in price will result in less supply and more demand, while an increase in price will do the opposite. This works well for most assets but it often works in reverse for stocks due to the mistake many investors make of buying high in a state of euphoria and selling low in a state of fear or panic as a result of the herding instinct. In case an increase in price causes an increase in demand, or a decrease in price causes an increase in supply, this destroys the expected negative feedback loop and prices will be unstable. This can be seen in a bubble or crash.
The Efficient-market hypothesis is an assumption that asset prices reflect all available information meaning that it is impossible to systematically “beat the market.”
Trend
A constant movement of a variable over the course of time. Depending on the time frame, it can be considered a short-term or a long-term trend. For example, the movement upward in a stock price over the course of a few days or weeks is considered a short-term uptrend. A constant, upward move in the price of a security over months or years is considered a long-term uptrend.
Trend reversal
Trends are sustained periods of rising or falling prices. When a stock price is moving up, it is an uptrend. If a security’s price is moving lower, it is considered a downtrend. Reversals occur when stock prices go from uptrends to downtrends or downtrends to uptrends.
Trend lines
A term used in technical analysis to indicate the direction of a stock price over a period of time. On a stock chart, it can be seen as a straight line along the bottom of an upward-moving stock (market) price or along the top of a downward-trending stock (market) price. Technical analysts believe that the longer the trend line, the more likely it is the stock price will continue in that direction. A break in the trend line indicates a change in trend.
Market Trend and what creates Trend?
The direction where the market is moving known as market trend, or in other words general direction of the market is called market trend. It could be either upward trend, downward trend or market with no movements. Usually those trends are taken place by four main factors. They are,
- Government
- Internal transactions
- Speculation
- Supply and demand
These factors will cause movements of the stocks in the short and the long run. It is very important to understand how these factors are inter-related together. Even though these elements are very closely connected to one another.
Stock market bubbles and Crashes
A stock market bubble take place when market participants push stock prices above their real values. One of the main reason for this is excess liquidity in the market, on the other hand inappropriate lending of banks could be another reason. However, stock market crashes happen after a market bubble, market crash always follows a market bubble. Usually stock market crashes happen due to sudden panic of investors. As a result there will sudden drop of the stock prices due to panic selling in the market.
Importance of investing in stocks
If investors looking to grow their wealth in the long run, investing in stocks is one of the best option that is available to make higher returns. It is true that taking a higher risk is always paid off by giving higher returns.
If an investor buy stock at the right time and hold it for some long period it is possible to make healthy returns, whereas investor receives both dividends and capital gains by selling stocks at a higher price. Further, investing in stocks give good return on investment.
Moreover, stable companies that keep growing further will give good dividends over a long time and the price of the stocks in these companies tend to rise steadily.