The stock market is all about trading, which involves opposing interests of investors where one is selling and the other is buying. A potential investor or shareholder must therefore acquaint himself with adequate information in the trading process of the stock market in order to maximize profits and minimize losses.
It is always a two-way event, and so one cannot really say that it is the seller or buyer who is at loss or gain, due to constant price fluctuations in the stock market at any given hour. For instance, if a stock seller sells his stocks and the stock price rises the next minute, he is at a loss, and vice versa since the stocks which have just risen in value are no longer his.
Doing a critical study of the stock market is pertinent for an investor or an intending investor before he begins trading in the stock market.
The Unpredictable Nature of Stock Prices
Stock prices are never stable but can be fairly predicted by stock brokers, who are experts in the field. Volume of available shares, changes in demand and supply (where for instance the greater the ratio of stock sellers to stock buyers, the greater the tendency of stock prices to fall), natural disasters and policy framework of the nation, are some of the major factors incriminated in the fluctuations of stock prices.
These factors as well as investor’s sentiments, and information credited to reputable stock market figures are all responsible for the unsteady nature of stock prices.
How difficult is it to predict the Stock market?
Uncertainties abound in the stock market as no one can categorically predict the turn of events. For instance a record of constant rise in stock prices over a long period may end up making everyone relaxed until something happens and prices change drastically. When prices drop, wise investors who have been waiting would immediately push in money and invest. On the other hand, at a favorable time when prices hit the roof, stock holders would immediately sell off. But these fluctuations can hardly be accurately predicted.
However, business is all about risks and those who are inclined to taking risks will not always wait for a perfect time. They keep watching, investing lower amounts and selling at higher amounts.
There may never be a perfect time, although one could carefully monitor the trend of price fluctuations (Evaluation of Stocks), and take note of those times when stock prices are usually fair as well as find out usual causes of price fluctuations (Causes of Price Fluctuations). One should also be good enough at decision-making (Decision-Making), so as to launch the best tactics while deciding on stock market activities. We shall take a closer look at these factors below:
Evaluation of Stocks
Stock prices are determined by the state of market activities. Investors are careful to compare the original stock prices and their fair prices at the moment of price survey. This helps in making the right decisions.
For instance, if the original value of a stock is $10 per share and the fair value is $15, you may purchase at a profit, but if the fair price is $5, buying such stock will be a risk since it will be regarded as overvalued to your own disadvantage.
There are ways to determine the fair value of a stock even though the standard method requires the use of a formula.
These are some of the ways of determining the fair price of a company stock:
- Deducting the sum of the value of liabilities and depreciation, from the sum of the value of all assets.
- Determining the basic value of the stock by calculating the net current value of future earnings.
These methods may not always yield the same results. As such, it may be difficult to know when a stock is undervalued, fairly valued or overvalued. At each point, it may take quite a long while for stock value to adjust, and so there is no guarantee that an overvalued stock will crash suddenly when investors sell. For this reason, it is very difficult to predict price fluctuations in the stock market.
Causes of Price Fluctuations
As a stockholder or a potential investor, it is advisable to find out the events that bring about price fluctuations. These are the factors that will always determine the gains and losses of your investments. Critically analyzing such factors will help you make good investment decisions.
This is the most determining factor as all other factors would fall on the final investment decision taken by the investor. Wise and rational decisions have to be taken to forestall possible damages.
Emotions however come into play to some extent when making such decisions as it helps us to do proper research and make good conclusions that will satisfy our guided expectations based of our status and priorities.
Using the purchase of a house as an example, you would have to consider the features of the house to be sure if it has your basic needs such as the number of rooms needed, namely; luxury rest room, wide living room, swimming pool, and guest suites so that you can impress your visitors according to your status. Then you consider the location of the house to be sure it has an access road and constant power supply. These and many other factors will be considered before you approve of it.
In the same vein, making decisions about your investments comes with wise decisions as no stock is a waste product. The stock you wish to sell is definitely needed by some other investor. At the same time, the stock you want to buy is being auctioned by another investor, sometimes long before you even needed them.
It is necessary to have adequate knowledge of the whole process so that you can make good decisions devoid of bias, especially under a dicey situation as this.
Understanding the Best Time to Buy and Sell Stocks
As an investor in stocks, the two most important decisions you have to always make are: when to buy and when to sell your stocks. You have to buy when prices are low and sell when prices are high enough to guarantee profits. Not knowing when to buy or sell can cost you your profits as well as your capital.
Deciding when to buy can be tough sometimes as most investors may be filed with pessimism as to the direction of the next stock price fluctuation. However, wise risk takers could cash in on such situations to buy stocks just after prices have fallen, in case stock prices begin to rise.
It is therefore important to apply caution and monitor the factors responsible for price fluctuations.
Citing an example with Company X: Assuming the value of the stocks of company X has declined by 10%, you must first find out the cause of the sudden stock price decline, compare with stocks of companies within the same industry, evaluate the extent of decline and find out if it has affected the entire stock market. If it has not affected the entire stock market or a larger number of companies in the same industry, then perhaps Company X must have a peculiar problem which has caused the sudden stock price fall. The cause has to be noted and monitored to forestall future occurrences.