The world's securities exchanges are the subject of countless books, scholarly articles, blog posts, websites, and essays. While there aren't many secrets about how the markets operate, there are numerous little-known facts that rarely see the light of day, at least in mainstream financial literature. Consider the following market-related bits of information and add them to your mental library of relevant information.
Many Investors Sponsor Aspiring Traders
Individuals who trade securities on a regular basis can sponsor up and coming candidates who show promise. If you are among those who have enjoyed success as an investor or trader, consider assisting someone who wants to build a career in the niche but needs help getting funds for college. You don't need to establish a scholarship fund or pay the bills directly. Instead, you can do someone a major service by cosigning on their college loan application.
The brutal fact is that many young adults don't stand a chance of gaining approval on a loan application because they have no financial history or credit rating to speak of. However, when someone acts as a cosigner on the loan, then their chances for approval can rise dramatically. Not only that, but they also gain access to lower interest rates, much more advantageous terms, and more time to pay back the total balance of the obligation.
California Spawned the Idea of Bull & Bear Markets
No one knows for sure where the terminology bears and bulls came from. The added mystery is why the bear is thought to be on the pessimistic and the bull on the optimistic side of the equation. One suggestion, although unproven, makes sense. In the 1800s, Californians entertained themselves with all sorts of unusual spectacles, including fighting matches between bulls and bears.
The two animals would be placed in an enclosed arena and allowed to battle each other for up to an hour. By the time the clock ran out, the bear was usually hiding behind a post while the bull was aggressively trying to gore the poor bear. Later, the analogy was applied to market traders, and the rest is history. Of course, no one has ever been able to substantiate that curious legend.
Timing is a Myth
Every few years, someone publishes a book about timing the stock markets for maximum profits, and every year, those theories fall flat when real investors try to use them to make money. Amateurs and professionals have been trying to time the market for more than a century, all for naught. Apparently, the securities exchanges behave randomly enough, and in response to such a multitude of factors, there are no straightforward ways to profit from time-related techniques.
Diversification is Not What Most People Think It Is
There's a widespread belief among new investors and trading enthusiasts that diversification means having many different companies' shares in a portfolio. But the definition is a bit more complex than that because the goal of diversification is not about numbers but types. If someone owns 10 shares in 20 different banking companies, that represents a high concentration of ownership in just one financial sector. However, if another investor holds 10 shares each in 7 companies that are all in different sectors, then there's a high degree of diversification in that portfolio.
Nearly All Working People Are Investors
It's common to hear, "I don't own any stocks." While most working adults might intend to tell the truth when they say those words, the facts go counter to the claim. Are they lying? Of course not. Instead, they are merely unaware that most teachers' unions, employer-sponsored 401(k) plans, and other job benefits packages consist of at least some securities like corporate shares, mutual funds, and similar assets. Once you take those facts into consideration, it's safe to say that probably most of all adults in the US own stock, directly or indirectly.
Investing & Gambling Are Totally Different Creatures
One of the most frequent criticisms of securities trading is that it's nothing more than regulated gambling. While it appears that the admonition is accurate, a few seconds of thought completely debunks the notion. First, in gambling, there are always winners and losers. Generally, games of chance in which people wager money are zero-sum trials. For every dollar won, there's a dollar lost. That's how it works in Las Vegas gaming casinos and elsewhere in the world's famous gambling halls.
However, investors suffer no such fate. They can all be winners if a company or project does well. The markets are not anything like a zero-sum game, which makes them completely different from gambling. Second, as every gambler knows, the longer a person stays at the table, the greater their chance of losing. Investing is the opposite, at least for diligent people who use professional techniques to choose solid stocks and other asset classes.
Two Months Are the Worst For Trading
There was a phenomenon called the October Effect that many people believed in. The concept was that the month was the worst of all for investors. Typically, investors would point out that the major price declines in 1987 as well as 1929 both occurred in October. However, that pessimistic view has turned out to be incorrect, as statistics show that the month is not the worst of all. But October does lead the pack in one scary category, and that's volatility. It remains the year's most roller coaster month for securities prices.
What about September? It is the current record holder for falling prices as for the past 73 years, the average drop in the value of the major exchanges in September is between .5 percent and .8 percent, but there are a few valid reasons for that kind of activity. Many active traders take vacations in late summer and sell off some of their stagnant holdings in the ninth month of the year. Additionally, there is a widespread belief that investors who enjoy annual gains on their portfolios tend to cash out sometime toward the end of the summer season.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.