The term January effect is used to describe a historical trend, whereby the prices of securities rise in the month of January. The January effect is classified as a secondary trend, since it is relatively short in duration.
Financial markets, such as commodities, bonds, and stocks, typically demonstrate an upward or downward trend over time. The January effect is a secondary trend, which manifests itself as the largest monthly increase in a financial market, or an individual security, for the remainder of the current calendar year.
The January effect is thought to be the result of two factors:
Since individual investors are more likely to purchase small cap stocks, the January effect is thought to affect these securities more than mid and large cap stocks.