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Top 5 Stock Market Anomalies Every Investor Should Know

Nov-16-2022Blog by – Mr. Ashish AjmeraRead Time: 4 Min.Word Count: 598
100Top 5 Stock Market Anomalies Every Investor Should Know

A good investor always calculates risks before jumping the gun. They speculate, factor in the market trends, and follow all the guidelines whether they are investing in bonds or shares. Yet, there happen to be occurrences like Black Monday in the global market or the 2008 stock market crash in India.

While we can now analyze and estimate why those crashes occurred, they happen to shock and baffle all in their one-day debacles. With such incidents, one thing is for sure: the market does not always play by the rules.

There are certain anomalies that exist in the trading world that not only fascinate, but also make a difference in how we plan our portfolio. 

Delving into the World of Investment Anomalies:

1. Fallen Angel Bonds
While investing in bonds, one absolutely has to know what a fallen angel bond is. A fallen angel refers to a bond the status of which has been downgraded from investment grade to junk bond status. This typically occurs due to the financial distress of the issuer.

Fallen Angels can present themselves as having fallen from heaven since some of them are high-yielding. For investors with a high-risk appetite, these volatile bonds are quite attractive. 

2. The January Effect
This anomaly actually happens to be quite common. It suggests that stock prices typically rise in January. There are many factors at play that might result in this. 

One is that it is the last quarter of the fiscal year, and as far as sales and revenue go, it always outshines at the last hour. Additionally, there’s consumer sentiment involved and investors usually sell their underperformers. A lot of what is observed in these anomalies can be attributed to consumer behavior. 

3. Small-Firm Effect or SFE

As the name suggests, this theory hypothesises that smaller companies or small-caps have more growth opportunities than larger firms. As per the theory, these small-capitalization stocks tend to outperform large-capitalization stocks.

How is that? Well, the growth of a stock is determined by the company’s fiscal growth. It might take a larger firm, for example, a revenue of 20 million to show 10% growth. Whereas, a smaller firm would have 40% growth in the same revenue.

4. Low Beta Anomaly
This one contradicts one core belief amongst the investor fraternity: High risk yields higher rewards. A study done by Harvard Business School researchers suggests that low-beta stocks, i.e., less volatile stocks, actually outperform high-beta stocks.

The study was done in 2013, and while this may stand true for some stocks, the best practice is to have an advisory for larger portfolio management. 

5. Price Reversal Anomaly
As simple as it goes, price reversal is a phenomenon that suggests that stocks that have performed quite well or quite badly over a period of 12 months (typically), change their course. That is, following the period of a year, they start performing poorly or vice-versa.

There is a lot of research to support this anomaly and it fits the investment know-how since the performance of great-performing stocks would become expensive and the opposite goes for low-performing stocks.

Among the top share brokers in Mumbai, Ajmera X-change can provide investment advisory for your portfolio.

Conclusion

All in all, while there are core fundamentals and market trends that shape our decision-making when it comes to investment, there are anomalies at play too. Often, the complexity and contradiction of information can cause us to make hasty decisions. 

For sound investment decisions, you can bank on Ajmera X-change, one of the best depository participants in Mumbai. 

Get in touch with us to know more.


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