Four Phases of a Stock
If you are an investor or trader then it is highly crucial to your success that you understand the different phases or cycles through which a stock moves. The stock price would not always stay the same. Today a share of Google might be worth 16$, one month from now it could be 28$ or maybe 12$. The price of any stock is always shifting, this shift usually happens because of the supply and demand factor. When the demand goes up, the stock price goes up. When the demand goes down or is less than supply, then the stock price will slowly start to fall.
But it's always not a haphazard movement. Though you wont be able to predict what the price of Google shares would be one month from now, knowing the current cycle of Google shares will give you an idea on where the stock price is heading thus giving you the ability to speculate.
The 4 phases of a stock are as follows:----
1. Accumulation Phase
2. Expansion Phase
3. Distribution Phase
4. Contraction Phase.
Accumulation Phase (Stage 1):-
This is usually longest cycle through which a stock can go through. It is a period when the stock is highly undervalued, but most people don't realise it. The majority would still believe that the stock is bound to reach lower levels, so they keep their money away from the stock. However, this is usually the cycle where smart investors starts to buy the stock. Hence the name, "Accumulation Phase". Because the smart guys are all accumulating an asset which they know is bound to go up. If you are able to see any stocks in this area, then don't miss out, make sure you put your money in there, cause the phase that follows is the most exciting one.
In this phase the stock usually would be moving between a support and resistance level.
Expansion Phase (Stage 2):-
The phase where the stock moves upwards, breaks the current resistance level and continues to go up is called the "expansion phase". Some investors at this point would begin to notice that an up trend has started and would start to invest their money into the stock. The expansion phase is usually triggered by some financial institution who sees that the stock is undervalued and buys the stock in large numbers. Expansion Phase is triggered mainly by the emotion called "greed". All smart investors,traders who have experience would be buying the stock at any of the above two cycles.
Distribution Phase (Stage 3):-
Here the stock has reached a peak and smart investors now understand that the stock has reached too high to go anymore further. So they will start dumping their load. But guess on whom they are dumping their load. That is right, novice or amateurs who are not aware that stock's expansion phase has completed. New traders look at where the stock has been and think that there is more room to grow. So they start buying these overvalued stock.
Like in the accumulation phase, the stock will keep on moving between a support and a resistance.
Contraction Phase (Stage 4):-
The most dangerous cycle of a stock. This cycle is motivated by "fear". This is where the stocks actual value is realized by the market and its value plunges down at extreme pace. Never enter into a position at this cycle. If you already have stocks in this position, make sure you get out as fast as possible. Because the longer you wait, the more you will lose.