Christmas is a time of giving and (hopefully) receiving, so it’s no surprise that the stock market would mirror this behavior during this season.
The reasons behind this Christmas behavior of the stock market, however, has little to do with the actual Christmas holiday, but because the Christmas season marks the end of the year and the beginning of a new one, which not only involves a lot of “new start” mindsets among business new and old, big and small but marks the end and beginning of the new fiscal year for most companies.
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As a market that’s open nearly all year round, the stock market naturally ebbs and flows throughout the year depending on several factors, but the end of the year sees a very consistent set of behaviors among companies, brokers, and investors – behaviors that those with a keen eye for stock trading can take good advantage of.
1. Stock prices drop before Christmas
As the end of the year approaches, many companies rebalance their portfolios. This often results in the company selling some of its stock. The reason behind rebalancing can vary, from stock splitting resulting in an abundance of new stock to meeting target allocations between stocks and bonds, putting up to market either asset that performs better than the other that is in excess.
While companies can potentially rebalance any time of the year, it often happens at the end of a fiscal year, which, in the Philippines, coincides with the calendar year. The weeks before Christmas, therefore, is a prime time to look at companies who might be putting up more stock to market, which results in a brief increase in supply and therefore lower prices – a good time to invest for those looking to grab prime company stock at a discount.
2. Stock prices rise after Christmas
Since the new fiscal year starts in January, the weeks after Christmas is therefore marked with the stock market becoming invigorated by fresh capital, be it from companies looking to expand or investors having more resources at their disposal. This results in stock prices being pushed up in January.
This makes it a good time to sell some stock to make a quick profit. Be wary though and don’t let go of all your stock. Companies investing in new projects can potentially lead to even higher stock value later in the year.
3. Small companies, reliable gains
Because small companies generally have smaller stock values, the rising and falling of stock prices through Christmas tend to be more definitive and stable. This benefits small and medium businesses because the predictability of this behavior makes for easy investment by traders.
Trading in small business stock is low-risk and doesn’t result in big profits, but it is profit nonetheless. This infusion of capital, even if small, can benefit small businesses in many ways, helping the company – and its stock – to grow in value through the rest of the year if handled well.
4. Bigger companies: Bigger risks and profits
Stocks of bigger companies tend to be traded in greater quantity and value during the Christmas season to take advantage of the predictable stock market behavior at the end of the year. Due to this heavy activity, stocks of bigger companies tend to be more volatile, becoming prone to surging that, in turn, may result in mass-selling or buying among investors or traders.
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While not unusual in the case of big-company stocks, it can be disconcerting to the inexperienced trader. A stock that might just be experiencing a brief price dip might result in many investors divesting themselves of stock, only to see prices spike up, resume its previous value, or stay down too long.
On the flip side, stock prices might suddenly spike up, providing a prime opportunity to sell, but missing the sweet spot of that price spike might result in a missed opportunity for a big profit. Buying or selling stocks of bigger companies, therefore, entail a bigger risk, but can potentially lead to bigger rewards, but only for the vigilant trader.
5. Keep a keen eye
Remember that all other traders and investors out there are keeping an eye on the market at the end of the year, too: you’re not the only person looking to get a good deal on some prime company stock. So be quick, but also be educated in the stock you’re eyeing and on your behavior.
Study the company you want to invest your resources in – especially their stock behavior in previous years – and be sure not to rest everything on one decision. While taking big risks can lead to potentially big gains, it can also lead to potentially steep losses. Temper your stock trading with a little finesse:
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Stick to a trade budget, buy within your budget before Christmas, sell a little after Christmas, put in a little risk trading with big companies, but be sure to invest in small companies for small-but-sure gains – the latter will thank you for it, too.