Definition
The term January effect is used to describe a historical trend, whereby the prices of securities rise in the month of January. The January effect is classified as a secondary trend, since it is relatively short in duration.
Explanation
Financial markets, such as commodities, bonds, and stocks, typically demonstrate an upward or downward trend over time. The January effect is a secondary trend, which manifests itself as the largest monthly increase in a financial market, or an individual security, for the remainder of the current calendar year.
The January effect is thought to be the result of two factors:
An increase in the purchase of securities following a sell off in the month of December, as investors lock in capital gains or losses to be reported on their federal income tax returns.
The payment of yearend bonuses to employees, which subsequently invest this money in the stock market.
Since individual investors are more likely to purchase small cap stocks, the January effect is thought to affect these securities more than mid and large cap stocks.
Related Terms
The term Monday effect is used to describe a historical trend, whereby the trading pattern of a financial market on the previous Friday will continue at the opening bell on Monday. The weekend effect is believed to be a result of increased investor pessimism on Saturday and Sunday.
Moneyzine EditorNovember 6th, 2024- The term weekend effect is used to describe a historical trend, whereby financial markets tend to decline more on Monday if there was a decline on the preceding Friday. The weekend effect is believed to be a result of increased investor pessimism on Saturday and Sunday.Moneyzine EditorNovember 6th, 2024
- The term suckers' rally refers to a temporary increase in the value of a financial market or individual security, despite the lack of an improved outlook. A suckers' rally is classified as a secondary trend, since they are typically short in duration.Moneyzine EditorNovember 6th, 2024
The term catching a falling knife refers to an investor purchasing a security as its price drops significantly. An investor will attempt to catch a falling knife when they believe a security's value is about to rebound.Moneyzine EditorNovember 6th, 2024
