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Why Do Stock Market Returns Look Like a Bell Shaped Curve?

Original post by Michael Wolfe of Demand Media

One of the best ways of measuring the returns of a portfolio of stocks over time is with a graph or chart. While you can look at a set of numbers, it is often easier to demonstrate the movement in the value of various assets through graphs and other visuals that track value. Sometimes, these returns can resemble a bell. This can happen for multiple reasons.

Return on investment

Return on investment means that a person examining his returns would be looking at the amount of money he got back as compared the amount of money that he invested. Returns can be measured as a set figure, or as a percentage of the original investment.

Bell Curve

When these returns are graphed out, they may be mapped against the time during which the investor held the equities. For example, a person may have a graph that shows the returns he has received on his portfolio over time. If the graph takes the shape of a bell, this shows that the value of the portfolio began slowly, then rose relatively sharply, and then fell at roughly the same rate as it had increased.

Possible Reasons

There are many reasons why a graph of stock market returns could take the shape of a bell. This implies that the assets rose slowly, then steeply, before plateauing and then falling sharply. This graph suggests a boom followed by a bust. However, the actions capable of creating such a graph are numerous.

Considerations

Depending on the assets whose returns are being measured, the graph can take many different shapes - not just that of a bell. A stock market graph can resemble a steep line either ascending or descending, a zigzag line, a curve or nearly any other shape. A bell merely means something has gone up and the gone down again.

                   

References

  • "Investing For Dummies"; Eric Tyson; 2008

About the Author

Michael Wolfe has been writing and editing since 2005, with a background including both business and creative writing. He has worked as a reporter for a community newspaper in New York City and a federal policy newsletter in Washington, D.C. Wolfe holds a B.A. in art history and is a resident of Brooklyn, N.Y.

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