Election Theme Stocks: Why You Should Be Careful

When election season rolls around, there's a phrase that keeps popping up in the news: theme stocks. As soon as a candidate gets attention, the share prices of companies supposedly connected to that candidate start swinging wildly. Today, let's break down why this happens, and why beginners should be extra careful.

What are theme stocks?

Theme stocks are stocks that move together as a group because of a specific issue or expectation. During an election, the issue might be something like 'if this candidate wins, this policy will get pushed through.' Companies that look like they'd benefit from that policy rise and fall as one bundle.

Here's the key part: what moves them is not the company's actual earnings, but 'expectations.' Prices swing based only on a guess about something that hasn't even happened yet.

Why do they move so fast?

Election theme stocks get going once a 'connection' is made. For example, a company with a factory in the candidate's hometown, or one whose executive went to the same school as the candidate. Honestly, these are often connections that have little to do with the company's ability to make money.

Even so, just the rumor that a company is 'related' can draw a crowd, and the price shoots up fast. Then once the election results come out or the excitement cools off, it can fall just as fast as it rose.

Why beginners should be especially careful

First, a price that rose for no real reason can fall for no real reason. Without the solid floor of actual earnings, there's nothing to hold it up the moment the mood shifts.

Second, it's easy to jump in too late. By the time it's on the news, the price has often already climbed a lot. You can easily end up buying at the highest point and selling at the lowest.

Third, unconfirmed rumors move the price. If you keep getting swept up in 'I heard that...' tips, you lose any basis for making a real decision.

So what should you do?

The best move is to ask yourself whether you can explain 'why it's rising' in a single sentence. If you can't go beyond 'I heard it's up because of the election' and actually explain 'what this company sells and how that helps it make more money,' that may be a sign it's rising on expectations alone.

Elections come around on a cycle, and theme stocks show up again every time. Just by not getting swept up in the mood each time, you can avoid big mistakes. Slowly train your eye to look at the company itself, not the expectations.