For many investors, buying stocks is a way to earn better returns than they would if they simply parked their money in low-interest money market accounts or similar savings products. The risk is, you can also lose money investing in stocks that go down in value. To help offset this risk, stock investors are constantly on the lookout for trends and patterns that can give them a better chance of turning a profit. An example is a pattern showing that stocks tend to go up on the first trading day of each month.
How It Works
The investment strategy of taking advantage of the statistical rise in stock prices on the first day of the month involves what is called day trading. This means you buy stocks and hold them for one day only. You buy the stocks at the very end of the last trading day of the month and then sell them at the very end of the next trading day, which is the first day of the month. You then stay out of the market for the rest of the month, until the end of the month comes and you repeat the process.
First Day Demand
There are some popular theories around to help explain why this consistent pattern of first day increases occurs. One theory involves increased demand for stocks. On the first day of the month, there is a large influx of money put into the stock market. Much of this money comes from payroll investment and similar plans. When there is an increase in the amount of stocks being purchased, prices are driven up.
Institutional Investment Activity
While there are many individual investors in the stock market, institutional investors tend to have the biggest impact on prices because they buy in the largest volumes. These are organizations such as mutual funds, pension funds and insurance companies. They usually invest in many different kinds of stocks. These institutional investors often adjust their portfolios by buying new stocks at the beginning of each month. This rise in buying volume tends to drive the prices of stocks up.
Psychology likely also plays a part in why certain investors buy stocks on the first day of the month. Just as many people consider the new year a fresh start, many investors treat the start of each new month in a similar way. They view the first of the month as a fresh opportunity to either reverse the prior month's losses or add to its gains. In addition, certain economic and industry reports are released on the first day of the month, which can also contribute to a rise in stock purchases. This is especially true when the data are positive because stock buying usually rises on signs of economic growth.
Kerry Zias has been a strategic business consultant and college instructor of business administration courses since 1990. He has taught courses and performed professional consulting work in the areas of marketing, management, business start-ups, entrepreneurship, real estate, sales psychology and performance, business communications, business law and political/governmental relations. Zias holds a Master of Business Administration in marketing from National University.