Asset managers often increase holdings in successful stocks right before the end of the fiscal quarter to make it appear as though their positions did better than in actuality. Holding shares of a company near the end of the quarter gives the appearance that the asset manager reaped the gains of an appreciating share price throughout the entire quarter rather than just a few days. This also applies to decreasing holdings in unsuccessful stocks as well.
In psychology, “herd mentality” refers to the individual’s proclivity to follow the group rather than their intuition. The same principle can be applied to the stock market. An investor may emulate the trades of others rather than using their judgment. The same can be true concerning stock analysts: an analyst may be more likely to agree with others than disagree. This phenomenon can result in market bubbles when optimism is high, or market panics when optimism is low
Stock analysts evaluate companies and offer their opinions about future trajectories of a given stock price. They consider historical performance, industry growth, management guidance, and other factors to make projections and ratings. Analysts may issue ratings of “Buy,” “Sell,” or “Hold,” for example. Analyst upgrades or downgrades, such as a change from “Hold” to “Buy,” have the potential to move stocks in either direction. It is also important to understand that some analysts carry more respect and weight than others.
A sudden downturn in price after entering a position may discourage many investors. However, it can be beneficial to double down by increasing your position, thereby “averaging down.” An example: a trader buys stock in a company at $100 a share. The share price declines to $80 a share. If the trader is still bullish on the stock, they can double their position while decreasing their average purchase price to $90 a share.
Often, traders may have uncertainty or pessimism regarding a particular trade or investment position. If you are “in doubt,” it is sometimes best to “get out” of your investment. By selling off or reducing your position, you are limiting your risk and sidestepping potential losses.
What are pre-market and after-hours trading and why are they essential in understanding the markets? The New York Stock Exchange (NYSE) and NASDAQ’s weekday trading window is from 9:30 a.m. to 4:00 p.m. Eastern Time (ET). However, there is much market activity that takes place outside of this window. Pre-market trading, which lends its name to PreMarket Prep, occurs before the market opens, while after-hours trading occurs after the market closes.