A rebound is the period of recovery following a period of negative activity or losses. The term rebound is commonly used to describe a company posting strong financial results following a year of losses, when the price of a stock or security has risen from a lower level or when the general economy bounces back following a recession.
How a rebound works
Rebounds are part of natural business cycles or the wider economy, periods of losses are usually followed by periods of improvement and in some cases a boom in growth. Market declines and recessions are inevitable as are boom and bust cycles in stocks.
Looking at stocks as an example, the stock market can decline when stocks are overvalued in relation to the pace of economic growth or when assets are overinflated due to speculation. The price of commodities such as oil can decline when supply exceeds demand, however, in almost every instance they will rebound following this period.
Bitcoin is a good example of an investment instrument that frequently follows the boom and bust cycle. The price of Bitcoin will continually rise for a period of time and then drop significantly. But so far in the history of Bitcoin, it has always rebounded and often exceeded its previous highest price.
For example, the price of Bitcoin reached $61,000 in March 2021 and by July 2021 had more than halved to $31,000 but in November 2021 it had surpassed its price in the spring to reach $63,000. The period between July and November was its rebound period where it grew back to previous levels and eventually overtook its previous high price.
What else do you need to know?
Can provide investment opportunities
The period of decline, whatever the reason, can provide investors with investment opportunities. When the stock price is low, investors can take advantage of this and either buy stock they otherwise wouldn’t be able to afford or buy more stock than previously affordable.
Good long-term gains
Buying stock when the price has declined can be a good long-term investment strategy, and one that can provide good long-term gains. Buying low and selling high after the price of the stock has rebounded is the aim of all investments and the best way to make the best gains.
Can test your nerves
Although the cycle of decline and rebound is natural in the economy and in investments, for some investors a sudden drop in stock price can test their nerves. With many opting to cut their losses and sell low, but playing the long game can often return good gains.
Not always clear when the rebound will occur
While in almost every instance a rebound will eventually occur, it is unclear how long it will take for that to happen, which can make investors uncomfortable. In our previous Bitcoin example, the rebound happened within months but sometimes it can take significantly longer, which can affect an investors confidence to hold out for the rebound.
