You may have heard the old saying "sell high, buy low." Although this phrase is a general strategy for buying stocks, it doesn't tell actually tell you when to do it. It is well known that the stock market is affected by seasonal trends. Understanding the way the market works can help you to choose the prime time for a wise investment.
Seasonality vs. Market Timing
When deciding to make an investment, you need to understand two concepts related to timing. The term seasonality refers to successfully predicting the state of the market during a particular time, and making a preemptive move to gain from it or avoid loss. For example, if you think a certain month will have strong returns, you might “stock up” during the preceding month. On the other hand, market timing is a prediction about the market's direction in the future based on hard financial and economic data.
Invest Wisely: Summertime or New Year's
It has been shown that the market has generous returns during summer and at the very end of the year. The S&P historical data for average monthly returns shows that September is usually a down month. An investor looking to take advantage of seasonality would buy up stock in September, possibly for low prices, and ride out higher returns in the historically strong month of October.
Likewise, you can take advantage of seasonality during the month of December by buying up value stocks, or small caps. January is a time of the year where investors come back from the holidays with buying fever. The buying frenzy pushes up prices, especially those of the value stocks and small caps. Thus, if you can buy these for a low price in December, you may be able to profit from them once January rolls around.
However, most stock market experts caution that it is very difficult to predict the market at any time. Thus, you need to research thoroughly and prepare an adequate plan.
Capitalize on Losses at the End of the Year
Investors who have loss money throughout the year often seek out tax losses in the following year's tax returns. To take advantage of this, they sell under-performing stocks in late December. If you want to seek out the same advantages, it is wise to try to beat the crowd and sell off your negative stocks in late November or early December.
The Upwards Trend During Holidays
Holidays in the U.S. are usually marked by stock market rallies. Generally these occur during the holidays of Thanksgiving and the Fourth of July. Around this time you will see a lot of trading going on, and it can be tempting to take advantage of the activity. However, you also have to consider that you will be charged fees for each transaction, and these fees may outweigh any potential profit.
A Case of the Mondays
You will hear that Mondays are generally slow days for the market. Many experts believe that this is caused by the slowness we all experience when returning to work on Monday. Others state that companies usually release bad news on Fridays, which makes investors weary on the first day of the next week. Stock splits also commonly happen over the weekend. You can take advantage of this by buying stocks on Monday to obtain a better price.
Really, there is no perfect time when you should buy stocks. As you can see, there are some trends which can help you make purchases and get the best pricing possible. However, the market is wildly unpredictable and it is always a gamble. The best advice is to watch the market for a while, research it, and make informed investment decisions.