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Stock
Market Education
When people
refer to "the stock market" or "the
market" it can sometimes be confusing to beginning investors
as to what those terms actually mean. Are they talking about all
the stocks that trade on the NYSE, all the stocks that trade in
the U.S., or all the stocks in the world? Typically when people
refer to “the market” they are talking about all the
publicly traded stocks in this country (they will usually say “the
global market” if they mean the entire world). Indeed, the
concept of “the market” can be a difficult one at first,
especially since beginners tend to think of stocks as individual
units. This section explains some different ways that investing
experts think about the market as a whole.
One way is to describe the overall trends in the market, such as
by defining them as bearish or bullish. A bull market, loosely
defined, is a market in which the major stock indexes have risen
by over 20% over a substantial period of time, usually measured
in months or years. Bull markets can happen as a result of an economic
recovery, an economic boom, or simple investor psychology. The
longest and most famous of all bull markets is the one that began
in the early 1990s in which the U.S. equity markets grew at their
fastest pace ever.
Bear markets
are the exact opposite of bull markets: they are markets in which
the
major indexes have declined by 20% or more
over a period of at least two months (a decline that large for
any shorter time period is simply called a “correction”,
especially if it followed a substantial rise). Bear markets usually
occur when the economy is in a recession and unemployment is high,
or when inflation is rising quickly. The most famous bear market
in U.S. history was, of course, the Great Depression of the 1930s.
During certain times of the year or certain times of the month,
the markets tend to exhibit certain behaviors more often than would
be predicted by chance. For example, the early fall, October in
particular, has historically been a time when the markets have
slumped, although the effect isn't extremely pronounced and there
isn't a logical explanation for it. Strong stock performance in
January is another example of a seasonal market trend. The so-called "January
Effect" occurs because many investors choose to sell some
of their stock right before the end of the year in order to claim
a capital loss for tax purposes. Once the tax calendar rolls over
to a new year on January 1st these same investors quickly reinvest
their money in the market, causing stock prices to rise. But although
the January effect has been observed numerous times throughout
history, it is difficult for investors to profit from it since
the market as a whole expects it to happen and therefore adjusts
its prices accordingly.
In addition
to the January effect and the October slump, there is also
something called
the “triple witching hour” that
occurs four times per year, during the final hour of trading
on the third Friday of March, June, September, and December.
This
is when the expirations on stock index futures, options on the
stock index, and options on stock index futures all expire. When
this happens, options and futures begin being bought and sold
in vast quantities, which causes large fluctuations in the
value of
their underlying stocks. Click
here to purchase our e-book, which contains over 280 pages
of stock market education.
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