Stock markets can be volatile, but why does it seem that the market often slumps on a Friday? Is Friday the time to avoid buying shares? Or is it a good day to snap up cut-price stock? Let’s take a look.
Why do stocks go down on Friday?
Though not an exact science, it may seem that share indexes such as the FTSE100 or FTSE250 slump on a Friday, more so than on any other day of the week.
There are likely three main reasons behind this.
1. The stock market closes at the weekend
Firstly, Friday is the last day of the working week and the last day the stock market can prepare for adverse news over Saturday and Sunday.
Such guesswork can have an impact on volatility, meaning stocks may be more likely to succumb to large swings. Large movements are more likely to be noticed than smaller ones, which is perhaps why Friday has a reputation for being unkind to stock values.
2. Expiring stock options in the US fall on a Friday
Another reason behind the Friday fall may be that in the US, the last day of trading expiring stock options normally falls on the third Friday of the month. This is where stock options, index futures and index options all expire. Such deadlines can help create volatility, increasing the chances of large dips.
While expiring stock options do not apply to the UK market, the US market can impact sentiment in the UK.
3. Professional investors do not welcome uncertainty
It’s worth noting the role of professional investors too. That’s because full-time traders are unlikely to favour extremely volatile markets so they may be more inclined to close a position on a Friday. Such collective behaviours may increase the chances of the market slumping on a Friday.
Should I sell stock on a Friday?
If you’re an active rather than passive investor, you may find that Friday is a good day to sell your stock. This is backed up by research that suggests market crashes typically occur on a Monday. So sell your stock on the Friday, and you could grab a bargain on the Monday once prices have dipped.
Yet, it’s important to note that big market swings can happen on any day of the week. If you are looking to day trade, relying solely on the day of the week is probably not the best strategy.
Remember, if you’re short-term day trading, the odds are typically stacked against you. Human emotion, asymmetric market information and technological limitations can all turn into your worst enemy.
Always think long and hard before considering whether to day trade and ensure you’re aware of the common pitfalls.
How should I invest?
You don’t have to be a day trader to benefit from stock market returns. The use of passive index funds has exploded in recent years. Passive investing allows investors to benefit from stock market gains without needing to research active funds or obtain the services of an independent financial advisor.
Yet, active investing is also a credible option and doesn’t necessarily mean day trading, where there’s a high chance of losing your money. Taking the time to research and pick your stocks can be a rewarding experience, as long as you know your chances of success. See our articles on active vs passive investing and the top British stocks for July.
If you’re new to investing, take the time to familiarise yourself with our investing tips for beginners.
