There is a story about a casino analyst employed with a brokerage
firm, who was fired on the spot, when he expressed skepticism
about the 1990 initiative by Donald Trump to splash into the
Atlantic City casino industry. Ill tell you why later.
Stock market risk is a form of speculative risk that is
different from gambling, primarily because in the event of
loss, all the owners of the particular stock, lose together.
With gambling, the casinos or lottery boards win when the
Those who gain dividends on the stock market do so typically
because they benefit from timing the market and following
the stocks. Commonly, most people follow the leading stocks
that are listed.
The neglected stock effect is the inverse of the concept
of safety in large numbers.
First pioneered by researchers at Cornell University, the
hypothesis proposes that under-followed stocks are really
equity in the up and coming.
These are likely to be the ambitious and thus emerging sectors.
The researchers discovered that about half of all stocks
listed in the S&P 500 are under-followed or neglected.
Neglect is refined as a relative concept in this theory.
They say the neglected half tends to outperform the half
that is followed.
There are reasons why this can happen. The first is that
stock analysts are hired by brokerage firms.
The strategy of the brokerage is a two-pronged one: it exists
to get people to buy securities from them and to make business
that need to raise financing want to use their brokerage to
The rule under the table in the stock market appears to
be, that an analyst employed by a brokerage firm, cannot afford
to be bearish.
The brokerage firms want you to buy and they want companies
to come to them to issue securities. The image of the brokerage
firms must therefore be always a positive one with a bright
outlook for everything.
It is the reason why the poor fellow was firedhe was
Once the flocks of analysts continue to follow a certain
stock, there is a push effect to buy. The prices go up because
a lot of well-paid analysts pay attention to its movements.
This triggers a sort of buyer confidence. But the returns
to the investor may not be as attractive in the long run.
If you are looking for a king of a bargain, that is probably
not the place to be.
The small companies that are not followed may be the lower-priced
stocks, and with lower financing needs, they remain in the
After the fact, in-depth technical analysis often shows
that these outperform big players.
The premise in technical analysis is market timing. They
monitor movements in individual stocks as well as movements
in the aggregate market.
These use price and volume movements and compare the relationships.
They relate falling prices with falling volume, and the converse.
Technical analysis on the data leads to mapping the market
and the individual stocks.