Free Money in the Stock Market? Arbitrage and Fundamental Analysis Anomalies

Can you really get free money in the stock market? Well, I’m going to share with you how it can be done and explain in simple language Arbitrage and Fundamental Analysis Anomalies.

Arbitrage

Let’s get right down to it. Arbitrage is when you can buy at a lower price and sell at higher price, at the same time and make money. It is a guaranteed money maker, so you could borrow money infinitely and make money infinitely. My brother used to do this with Bitcoin, as the prices of Bitcoin would not be the same in Japan and in the United States.

In theory, enough people or enough money gets traded in arbitrage so that the opportunities go away over time.  However, some markets such as Bitcoin between countries is more specialized and harder for people to figure out.

Postearnings Announcement Price Drift – Cumulative Abnormal Return

Companies with surprise positive earnings announcements will have a large increase in return not just on the day of the announcement, but the return will continue to grow steadily beyond 50 trading days after the announcement.

This was shown in the study by George Foster, Chris Olsen, and Terry Shevlin titled “Earnings Releases, Anomalies, and the Behavior of Security Returns,” published in The Accounting Review 59 (October 1984).

P/E effect

Portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.

Small-Firm-in-January Effect

Stocks of small firms have earned abnormal returns, primarily in the month of January.

Book-to-market effect

The tendency for investments in shares of firms with high ratios of book value to market value to generate abnormal returns.

The Neglected Firm Effect

The tendency of investment in stocks of less well-known firms to generate abnormal returns.