The entire financial industry rests on the fundamental concept of the market economy, which means you should be armed with some basic economic theory when you walk into the testing room.
Phases of the Business Cycle
The first concept you need to know is the business cycle, the series of fluctuations in the level of economic activity. The timing and degree of these fluctuations are notoriously unpredictable; however, there is a pattern that seems to recur with these gyrations. A hypothetical business cycle is comprised of the following phases:
- Peak: Economic activity is growing rapidly and production facilities are operating at full capacity.
- Contraction (Recession, Depression): Economic growth slows or the economy actually shrinks; sales decline and unemployment rises. This phase follows the peak. There are also different classifications of contractions:
- Trough: Economic activity is at its lowest point in the cycle.
- Recovery: Sales, employment levels and other measures of economic activity rebound and eventually reach a new peak. This phase follows the trough.
|Phases of the Business Cycle|Exam Tips and Tricks
Memorize the order of the phases of the Business Cycle. You may have a question asking you to put them in order. Recognize that this is a repetitive cycle, so the correct sequence may begin with any phase.
TradingYou need to understand the various phases of the market cycle to avoid bubbles and make the best investments.
InvestingExamine economic and sector performance over the business cycle to determine which ratios are most important for each phase of the cycle.
InsightsFinancial downturns are part of the economic cycle and may have important long-term benefits.
InsightsWhere are the best places to be when an economy starts to recover?
TradingStock prices seem random, but there are repeating cycles. Learn to take advantage.
InsightsHolding periods should be established after analysis of market cycles, to determine the most advantageous timing for entries and exits.
InvestingThey're hard to predict, but commodities cycles provide valuable information for traders.
InvestingFind out how to use this figure to analyze a firm's financial condition.
InvestingThe cash conversion cycle (or cash cycle) is one of the best early-warning systems available to you. Let's take a closer look!