Understanding The Stock Market Cycle

The winning investor should understand how a normal business cycle unfolds and the duration of these periods, paying particular attention to recent cycles. There is no foolproof guarantee that stock market cycles will last three or four years because it happened that way in the past.

The stock market ordinarily bottoms out while business is still on a downtrend, anticipating economic events months in advance. Analysts refer to this phenomenon as "discounting of the future." In like manner, bull markets frequently top out and turn down before economic recession begins.

Therefore, using economic indicators to tell you when to buy or sell the stock market is generally an exceedingly poor procedure. Yet some firms have people trying to do this very thing. It's a somewhat ridiculous approach, but it does seem to make those who don't understand the stock market very well feel better.

Ironically, economists also have a rather faulty record of predicting the economy. A few of our U.S. presidents, themselves lacking sufficient understanding of the American economy, have had to learn this lesson the slow, hard way. Around the beginning of 1983, just as the economy was in its first few months of recovery, the head of President Reagan's Council of Economic Advisors was a little concerned because the capital goods sector was not very strong. This was the first possible hint that this particular advisor might not be as thoroughly sound as he should be, because capital goods demand is never good at the early stage of economic recovery, and particularly so in the first quarter of 1983, when American plants were operating at a low percentage of capacity.

You should check earlier cycles to learn the sequence of industry group moves at various stages of the market. For example, railroad equipment, machinery, and other capital goods industries are late movers in a business or stock market cycle. This knowledge can help you determine what stage of the current market period you are in. When these groups start running up, you know you're near the tail end.

Almost always, the really big money is made in the first one or two years of a normal new bull market's upward movement. This, then, is the point in time you must recognize as soon as possible and fully capitalize upon while the golden opportunity is there.

The remainder of the up cycle usually consists of back and forth movement in the market averages, followed by a bear market. The year 1965 was one of the few exceptions, but this strong market in the third year of a new cycle was caused by the advent of the Vietnam war.

Stock Investing Basics

The first thing you should do before starting to invest is to seek professional advice from a reputable stock broker. This will give you an idea of your financial situation and whether or not you have enough cash flow to start investing. Have a clear idea of what you want to achieve by investing. It is a good idea to keep a cushion of money to the side instead of investing every spare dime in the stock market. You never know what will happen down the road.

Invest for the long term and look for stocks that are likely to appreciate over time. Research any company that you are considering investing in very thoroughly. Research their competition also. This will give you a better idea if your stock is likely to rise or fall in the future. The stock market should not be looked at as a gamble. This isn't Vegas. Take your investments seriously and make informed decisions about where you are putting your money.

Be on the lookout for good growth industries. It is always good to get in on the ground floor of a great investment before the price of the stock starts to rise. The better you get at research, the easier it will be to find these opportunities.

Spread your stock around. Don't invest all of your money into one stock. If one stock goes down, another stock could be rising. Diversify your stock portfolio to decrease your risk of losing your investments. Check into overseas investments also. The Internet and today's globalized economy makes if very easy to invest in international shares.

Go online with your trading accounts. The fees are lower than the standard brokerage house and you will have instant access to trading information and to all of your accounts.

Keep a close eye on the companies that you have investments in. Check their websites regularly for news or any other event that may change the price of stock. Become a regular reader of the business section of the newspaper also. You should never depend on the stock price only for the performance of your stock portfolio.

These are just some basic tips for getting started investing in the stock market. Study the stock market and investing before you actually start. The stock market can be a crazy place sometimes and the better informed that you are, the less you will lose.