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What is the October Effect?
The October Effect, also known as the Mark Twain Effect, is an anecdotally-founded fear that markets are vulnerable to catastrophe in the month of October. Several Octobers have appeared to be the origin of problems in the market: in 1929 at the onset of the Great Depression, the 1987 crash, and in 2008 at the start of the Great Recession. Perhaps superstitiously, many people expect October to be the worse month of the year for the market, supposing that if something bad were going to happen, it would happen in October. Statistically, there isn't much support for this idea. Continue reading...
What Does Mark to Market (MTM) Mean?
Mark to Market (MTM) is an accounting method meant to price an asset by its most recent market price. An example would be mutual funds, whose “NAV” price is a mark to market price of how much the mutual fund closed for at the end of a trading session. The mark to market accounting method has some pros and cons. On the pro side, if an asset is very liquid, then MTM will provide an accurate reflection of its current value. Continue reading...
What are “Dark Pools” of Money?
Large institutional investors sometimes trade on “Electronic Trading Crossing Networks," which allow them to conduct trades without publicly exposing them. They are used by financial institutions to move large blocks of shares without public investors even knowing about such transactions. Such examples of networks are “Liquidnet,” “Pipeline,” “SIGMA X,” and many others. It might be difficult to fathom the size of the transactions conducted over these networks, but the ownership of dark pools involves almost every institutional trading house. This is a huge business and regulators are carefully looking into their activities. Continue reading...
Is there such a thing as the “January effect?”
The January Effect is a hypothesis which states that stocks will see their biggest monthly gains in January. The January Effect states that the stock market usually increases during the first few days in January, or that the largest monthly gains of the year will be realized in January, therefore January will set the pace. There are many explanations for this effect, such as tax-loss selling in December, fresh starts after the New Year, and many others. Continue reading...
Is there such a thing as the “pre-holiday effect?”
Pre-Holiday price fluctuations have been observed in many instances, but there a difference of opinion as to whether the markets are higher or lower just before holiday. Pre-Holiday Seasonality is the idea that prices will rise or fall before a holiday weekend in which the market will be closed for a day. When researching this phenomenon you may find colloquial wisdom stating that prices always rise before a holiday, but in actuality most of the evidence points the opposite direction: prices are most likely to close lower the day or two before a holiday weekend, and may remain low the day after the holiday, but this provides a possible opportunity to ride the upswing. Continue reading...
What was the Mt. Gox Incident?
There have been many incidents where cryptocurrency has been stolen, but the Mt. Gox incident is the largest to date Mt. Gox was at one time the largest cryptocurrency exchange on the net, facilitating as much as 80% of global bitcoin trades, according to some sources. And then about 850,000 bitcoin suddenly went missing. At the exchange rate in 2014, when the problem came to light, that many bitcoin were worth about $450 USD. At the time of this writing, with Bitcoin at a high in 2017, that man... Continue reading...
What is Effective Annual Interest Rate?
Also known as the annual equivalent rate (AER), the effective annual interest rate is the actual annual interest rate on a bond or loan when it compounds more than once a year. The effects of compounding will make the AER higher than the annual interest rate if the security compounds greater than annually. Continue reading...
What is After-Hours Trading?
After-Hours Trading on the Nasdaq can take place after market close from 4-8pm EST or in the pre-market hours from 4-9:30am EST. Pre- and Post-market trading used to be reserved for large institutional investors or high net worth individuals, but is now made possible through the improvements to electronic trading networks and the demand from individuals trading from their computers at home. Interestingly, institutional investors can trade anonymously on the after-hours Nasdaq market, such that virtually no one knows what positions they take during that time. This is called trading in “dark pools of liquidity.” Traders on the after-hours Nasdaq cannot make certain kinds of trades or use certain instruments. Continue reading...
Is there any truth to saying “sell on Rosh Hashanah, buy on Yom Kippur?”
Since September is historically a lackluster month in the stock market, it can make sense to follow this modern proverb. There is an old saying on Wall Street, which stipulates that you should sell your positions on Rosh Hashanah (the Jewish New Year, which comes usually in September or October), and establish a new position on Yom Kippur (Jewish Day of Atonement), which usually comes a week later. Continue reading...
How to use the Chaikin Oscillator in trading
The Chaikin Oscillator is a volume indicator that can help traders discern if price movements are verified by changes in trading volume. When there are discrepancies, it can mean that prices are exhibiting overbought or oversold conditions. Before the Chaikin Oscillator, On-Balance Volume was the most popular indicator for the job. On-Balance Volume (OBV) is a popular leading indicator introduced in the 1960s by Joe Granville. OBV is a line built using differences between daily trading volume – in Granville’s estimation, the major driver of market behavior – adding the difference on days that the market or stock moves up and subtracting the difference on days when the market or stock moves down. It looks for instances of rising volume that should correlate with price movement, but price movement has not occurred; additionally, OBV can be used to confirm lag. Continue reading...
Are the markets efficient?
The concept of an efficient market is more applicable today than it was when it was conceived, a truly efficient market is nearly impossible. The Efficient Market Hypothesis states that random new information will affect the value of securities, and that new information disseminates so quickly among rational investors that it is futile to try to beat the “market portfolio.” Thirty years ago, this was more of a theory than an observable phenomenon, and plenty of inefficiencies in the dissemination of information and the pricing of securities could be pointed out. Continue reading...
Is there such a thing as a “presidential election cycle” impact on stocks?
Some analysts have popularized the notion that the 4-year presidential election cycle holds secrets to bear and bull markets. Found in publications such as the Stock Traders Almanac, The Presidential Election Cycle is the theory that different phases of the presidential term are correlated to broad market conditions. As will many such theories, it may not hold up under a lot of scrutiny, but there are some correlations to be found. Continue reading...
What is the “efficient frontier”?
The “Efficient Frontier” is a modern portfolio theory tool, which demonstrates to investors the best possible returns they can expect from their portfolios, relative to the amount of risk they’re willing to accept. For investors that find themselves below the “Efficient Frontier,” it means their strategy is not providing enough return for the level of risk assumed. The opposite is true as well. What the theory means to communicate is that investors would be wise to include some higher growth, higher risk securities in their portfolios, but combine them in a strategic way so as to gain risk/reward value that comes with diversification. Continue reading...
What does the Efficiency Ratio Mean?
The efficiency ratio is a metric that measures how effectively a company uses its assets and liabilities to run the business smoothly. There are several types of efficiency ratios that can give an analyst insight into a company: accounts receivable turnover, fixed asset turnover, sales to inventory, and and stock turnover ratio. Continue reading...
What is market efficiency?
Market efficiency describes the degree to which relevant information is integrated into the price of a security. With the prevalence of information technology today, markets are considered highly efficient; most investors have access to the same information with prices and industry news, updated instantaneously. The Efficient Market Hypothesis stems from this idea. Efficient markets are said to have all relevant information priced-in to the securities almost immediately. High trading volume also makes a market more efficient, as there is a high degree of liquidity for buyers and sellers, and the spread between bid and ask prices narrows. Continue reading...
What is “efficient market hypothesis”?
The Efficient Market Hypothesis (EMH) states that it is impossible to beat the market consistently over time, since all available information is priced efficiently into stock prices. But what the EMH misses is the impact that sentiment can have on price discrepancies in the short-term. Emotions can lead to gross mis-valuations (as we saw with the tech bubble in 2000), and market corrections can see stocks selling off dramatically for no fundamental reason. Continue reading...
What is Yield?
Yield is a term which describes the cash return on a security investment, and does not include appreciation. Yield is the cash paid out of an investment in the form of dividends and interest received. The term does not encompass the appreciation of the investment, and it may be evaluated in different ways for different types of investments, so comparisons of yield across asset types is not standardized or recommended. Continue reading...
What is Life Expectancy?
Life Expectancy at Birth Statistics — Found Here Life expectancy may be different for each subset of the population, based on risk factors and age. It is most commonly discussed as the average for an entire population or a specific age group, without regard for specific health risks that may be present. Life expectancy may come into play in discussions of the economy, the health of a population, or for individual planning purposes. Actuarial tables with life expectancy are published by government entities and private companies. The most basic variable will be age. Continue reading...
Who are Some of the More Well-Known Investment Managers?
There have been many notable investors who have withstood the test of time. Of those that are still living, Warren Buffett definitely stands out of the crowd. If you had invested $1,000 with him in 1965, the investment would be worth over $6 million today. Some of those who could be considered in the realm of "founding fathers" of sound investment strategy would include J.P. Morgan, Benjamin Graham (author of the famous "The Intelligent Investor"), and John Templeton. Continue reading...
What is Income Tax?
Income tax is paid to the government based on the amount of income earned. There are federal income taxes, and some states have their own income taxes, too. As an employee for a company, income taxes will be withheld from paychecks using the company’s best estimation of your annual earnings. At the end of the year it may turn out that they withheld too much, and the government may give you a tax refund for what was overpaid. Continue reading...