Investing for Beginners , investing

What is economical cycle?

An economic cycle means the repeated changes of the economical trends. While during very long economical period economy always has up-trend because of technological evolution and increase in labor productivity. However, during short/mid-term, economy is experiencing some rapid increases and slowdowns that mostly depend on psychological factors as consumers’ and manufacturers’ confidence. 

How does economical cycle work?

The cycle goes like this: when market is over-booming, property and other assets are getting too expensive and people are stopping to buy it, then speculators that see the decrease in demand start to sell their assets; respectively, prices of assets start to decrease which affects economy in few ways: when property prices starts to decrease it slows down construction sector and when stock prices are decreasing people are spending less; and then total retail sales slows down and companies are reducing their investments and new hiring, and after that sales of the companies are decreasing even more which cause strong reductions in personal and more people are losing their income.

Well, it is just an example of half of the economical cycle and every cycle is bit different. Often economical downturn is provoked by some financial market crisis which may be caused by bankruptcy of significant financial company. 

Investment during the cycles

The average duration of an economic cycle may last 7-10 years but without government interventions and good monetary policy economical downturn may last much longer (the case of Great Depression). If all cycles would continue exactly for 7-10 years, it would be simple to invest: you buy stocks low and wait for the economical peak and then sell the stocks.

But everything is not that simple in real life, because you never can be sure for how long the current situation will last, and stock market prices everything in before it even happens, when the first signs come out. In reality most of the investors act in contrary: when economy grows for long time and bull market continues, they are buying as much stock as they can, but if the bear market continues they sell their stocks cheaply.