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A stock cycle refers to the behavior of stock prices when an institutional investor buys and sells a large amount of shares. An institutional investor is a financial institution, such as a mutual fund or bank, that has the financial resources to leverage a large amount of capital. The stock cycle is typically broken into four phases: the accumulation, markup, distribution and markdown phases. Individual investors often look for the signs of these phases to maximize their own investment gains.
The first phase in a stock cycle is the accumulation phase. Accumulation refers to the period in which an institutional investor slowly buys up shares of a stock. If these institutional investors requested all their desired shares at once, the price of the stock would be driven up, thwarting their gains. Behavior of a stock during the accumulation phase is characterized by fluctuation between a base and ceiling amount, without long-term gains or losses. Though this is not an ideal time for individuals to invest, recognizing the signs of this phase can help investors speculate on a stock’s future price movements.
The second phase in a stock cycle is the markup phase. During markup, the institutional investor ceases purchasing new shares in a stock. The price of the stock then begins to steadily rise. Individual investors often attempt to define trends during this period to guide their own investment decisions with the stock. As long as the price remains above the trend’s projections, they will keep riding the trend.
After a significant period of markup comes the distribution phase. The distribution phase is similar to the accumulation phase except that shares are being sold instead of purchased. Like during accumulation, an institution is trying to maintain a steady stock price while it deals with shares. It is sometimes difficult to distinguish between the accumulation and distribution phases, but some signals are indicative of distribution. Price peaks that are consistently below trend predictions can foreshadow the arrival of the next phase.
The final phase in a stock cycle is the markdown phase. During markdown, stock prices display a steady fall. At this point, the institutional investor has sold its shares and the stock may return to a price level similar to that of the accumulation phase. Individual investors typically will want to sell their shares by the time the markdown phase has begun. The markdown phase is characterized by peaks that are consistently lower than previous peaks.