We’ve seen how the markets move in cycles but what are the factors that govern those movements? It’s many things but they can be grouped into two main categories: fundamental factors like monetary, policy, balance of trade and unemployment, and behavioral forces like how people respond to these policies. These two factors are always playing off each other in a series of actions and reactions like a cause and effect loop.

Now, as an investor, the key is to focus on the sequence of events in the business cycle and identify clues to determine what’s coming next. In general, the market goes through two phases: expansion which is generally good and contraction which is generally bad.

During the early stages of expansion, the recovery is driven primarily by fundamental factors as economies expand, and trade and employment picks up. Central banks usually tighten their policies to keep inflation down which is good for stocks and bonds, but not so good for commodities. These fundamentals lead to a rise in stock prices which only encourage more people to jump into the market. It’s good at first but as this greed and exuberance spreads, stock prices eventually outpace their actual value.

This leads to inflation, which is marked by an increase in commodity prices to counteract these behavioral forces. Central banks usually step in and increase interest rates, which help curb the money supply and decrease inflation. This action signals that the expansion is ending and stocks will soon be on the decline, but it also means that commodity related products will be going up. If you’re aware of these signals, you’ll know that this is a good time to switch from stocks to commodities.

Then during the recession that follows, behavioral forces will become stronger than ever, as more people realize that the stock market is declining. Fear and panic will spread, forcing even more to sell off their shares during these periods savvy investors will reduce their stock portfolios and wait for the market to turn around which they will because eventually central banks will step in and cut interest rates to increase the money supply. These fundamental drivers will lead to a rise in stock prices making it the perfect time to jump back in the market and that starts the cycle all over again.

Now as an investor, it’s important to recognize these signals and never lose sight of the bigger picture. It’s like Warren Buffett once said, be fearful when others are greedy and greedy when others are fearful. So, keep an eye on the fundamental and behavioral factors that move the market and always stay one step ahead of the game.

The stock market is a great place to generate wealth but before getting started, you have to understand a few basic terms. For instance, stock share and equity.

They’re all synonymous, all representing a partial ownership of a company. So, if you buy stock in Apple or SingTel, you officially own a share of the company. Buy 1000 shares and a company that offers 100,000 shares and you own 1%. Owning shares allows you to benefit from a company’s growth and profits in the form of capital gains and dividend payouts.

Capital gains represent the difference between the purchase price of an investment and the eventual selling price, so if you buy one share of a company for $1 and eventually sell that share for 5 dollars, you receive $4 in capital gains per share.

A dividend payout is the percentage of a company’s earnings that get paid to shareholders who have stock in the company, usually on an annual basis.

Those are the basic terms.

Now, let’s look at basic market function. It all starts when a company decides to sell its shares in an initial public offering or IPO. This is when a company goes from being totally private to one that is owned and traded by the public once on the stock market or exchange.

You can purchase stock in that company through a stock broker along with other companies also listed on a stock exchange, which leads us to our next topic how to choose which types of stocks to buy and trade.

One way is to separate them by sectors like financials, real estate, health care, technology and so on. Another approach is to divide them based on the size of the companies, also known as market capitalization.

On the low end are penny stocks which are cheap, volatile but offer high growth potential.

Then, there’s mid-caps which provides solid growth potential with less risk and on the high end, blue chips which are usually larger with strong track records, more stable companies with higher stock prices.

Finally, you could check out stock indices or indexes. These are used to measure the value of a particular section of the stock market.

For example, the S&P 500 index tracks the performance of 500 companies in the US markets giving us a good overview of the health of the overall US markets and in Singapore, there’s the Straits Times Index which tracks the performance of the top 30 companies listed on the Singapore exchange.

Every market has its own benchmark and tracking the indexes is a good way to determine the direction of the market overall, so those are the stock market basics.

Next up, let’s explore some of the other products that can be found in the financial markets.