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Trading and Investment Terminology

January Effect

The January Effect is a famous market anomaly.

The January Effect was first noticed by Sidney Wachtel, who was an investment banker, in 1942. Looking at data from 1925 onwards, he saw that small-cap stocks had outperformed the market in most Januaries. Beginning from 1928, the S&P500 experienced a positive development in January in 56 years out of 91.

 

In Simple 

 

The January Effect refers to a pattern exhibited by stocks -- particularly small-cap stocks -- in which they've shown a tendency to rise during the last several trading days in December and then continue to rally throughout the first week of January.

 

 

  • The January Effect is a theory that says that every December stock prices take a dip and every January they receive a boost. 
  • This is driven by heavy selling during December and aggressive buying during January, particularly early in the month. 
  • Investors tend to sell off low-performing stocks at the end of each year. 
  • They then tend to buy those stocks back a few weeks or even days later.

 

  • Company A - $10,000 Profit
  • Company B - $5,000 Profit
  • Company C - $7,000 Loss

In this example, our investor’s taxable investment income would be $8,000. They would have made $15,000 from the first two investments, but they could write off the losses from Company C.

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