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A study has found that companies with names earlier in the alphabet – such as Amazon – have higher turnover and volatility. Photograph: Darren Staples/BloombergInvestors face mountains of information when making investment decisions, so it can be tempting to take short cuts. A recent study identified one such short cut – using the alphabet to choose what stocks to trade.
The study, entitled The Alphabet and Idiosyncratic Volatility, found that companies with names earlier in the alphabet – think Amazon, Apple, and so on – have higher turnover and volatility. They also looked at the stocks of companies that changed their names. Again, volatility was greater among companies beginning with a letter very early in the alphabet.
This is not the first such study. The authors refer to prior research showing that investors over-weight early alphabet stocks, and that this can lead to increased trading activity and higher valuations. Time is finite, so investors cannot be expected to know everything about their stock purchases, but buying a stock because it begins with the letter A? There must be better short cuts than this.
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