What Stocks to buy in a typical recession?

When going gets tough , the tough get going. During every recession there are many investors who have squandered away large amounts of wealth in the share market. Many of them run away since they cannot handle the stress any more. Some remain but are confused which stocks to buy.

There are many analyst who claim that this recession is not like previous recessions and rather it is like the Great depression of 1920's. The most common reason given is this recession is caused by huge amounts of debt the US and other economies have accumulated over the years. However in both cases the recovery process is going to be same.

If you look at past data you would be inclined to believe that investing in small cap companies is always advisable in recession.

Example 1 :
The July 1981-November 1982 recession lasted 16 months. In the three subsequent years from the midpoint, the DJ Wilshire U.S. Small-Cap Index soared a cumulative 101%. The small-cap value index jumped 126% and the growth index advanced 78%. Midcap stocks turned in the second-best performance with a gain of 88%, and value topped growth. The same value-growth dynamic held for large-caps, which gained 82% but still lagged the DJ Wilshire 5000's 85% rise.

Example 2 :
In the three years following the 1990-91 recession's midpoint, small stocks added 105%, with value (up 114%) again outstripping growth (96% higher). Midcaps advanced 88%, but large-caps mustered just a 57% gain.

Example 3 :
The small caps rose about 25% from the eight-month 2001 recession. Midcaps increased by 18%, while large-caps actually retreated by 3%.

Now many people would seek to know why should the small-value phenomenon happen in a recession's recovery?

Genral hypothesis says there are two main reasons for it :

1. Small stocks are more speculative than larger ones. They tend to shine when investors realize a recovery is unmistakably under way -- those three years following a recession's midpoint. During economic expansions these companies can grow revenues and profits faster -- in percentage terms -- than larger ones, drawing investor attention.
2. Value stocks' prices are, by definition, cheap. That is why they have higher dividend yields and lower ratios of price to the per- share worth of investors' holdings (a.k.a. "book value") -- the two classic indicators of "value" stocks. Read our article on http://www.comparebroker.com/should_i_invest_now.php to understand these in more detail. When investor money pours into small stocks, those in the value category are poised to rise the most
-- again in percentage terms -- because they are rebounding from a lower level than are "growth" stocks.

First attempt you should also change it a little and then we would be good.

Wondering how much money to invest? Continue reading 100$ vs 5000$
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