Markets phases investors should know about

Just like stocks, markets, too, are cyclical in nature and go through various phases. Having an understanding of these phases facilitates trading behaviour and helps one to be profitable in the long run.

Broadly speaking, the market goes through four phases – Accumulation, Growth, Distribution and Decline. Let’s take a look at what happens during each of these phases.

Accumulation phase 

During the accumulation period the stock price hovers around a certain range, depicting that the buyers are accumulating the stock.

This phase starts after a stock has received major hammering or has seen a tremendous fall. 

Prices tend to consolidate or move sideways in the initial stage. Post that, there may be a new beginning for the stock.

Thus, this particular phase can be seen as an early opportunity for investors who trade with long-term objectives.

The next phase is the growth phase.

During this phase, the stock or the index gives a breakout from the consolidation or accumulation phase, and starts a fresh upward journey. 

As the price shows strength, market participation increases and the optimism, too, is at high level. Given the higher participation and the underlying bullish trend, the prices, more often than not, depict an unexpected sharp rise.  

Thereafter, comes the distribution phase.

Post stupendous gains in the growth phase, market participants get over excited and build unreasonable expectations from the rally. The mood seems so buoyant that threats of real negatives are also overlooked.

However, this is the stage wherein knowledgeable traders and investors sell their stocks – and you may see slow and steady selling or bouts of profit booking. 

Also, this stage may provide some early warning of a likely downturn.

Finally, we enter the declining phase.

In this phase, the stock price starts to witness massive selling pressure with short-sellers getting aggressively active.

Thus, the declining phase is also termed as a bear market. Positive news or developments are easily overlooked during this phase as fear grips investors.

Participants tend to liquidate their investments and holdings amid fears of further deterioration in stock prices.

To conclude, having an understanding of these phases and awareness of the various market phases helps in managing the inherent risk. A systematic approach toward these phases helps one be profitable in the long run.