When to buy and sell stocks
The economy is governed by a succession of cycles composed of a long period of expansion (growth rate above 0%) and a short recession (growth rate below 0%).
During a period of expansion, households consume a lot because they do not fear losing their jobs. Companies then hire unemployed to deal with the influx of business. These new employees also become consumers. The steady increase in consumption causes a continuous rise in corporate revenue and profits.
During a recession, households reduce their consumption and save more to face a possible period of unemployment. The decrease in household demand causes a fall in corporate revenues and profits. They are then forced to cut investment and lay off some of their staff to avoid bankruptcy.
Stock prices are closely linked to the economic cycles because most investors buy stocks during the expansion phase when corporate revenue and profits steadily improve (stock prices then progresses regularly) and sell their shares during the following recession when corporate earnings drop (the stock prices decrease continuously). More information about the investor psychology.
stocks must be purchased during a recession when they are traded at a very low price and
resold during the next period of expansion when the price is much higher.