Stock investors often wonder how to predict stock movement. The answer isn’t as simple as it seems.
In the past, many analysts and investors tried to predict stock movement by using complex mathematical formulas.
But today, there are far more advanced tools that can help you predict stock movement with greater accuracy. Our blog post will discuss some of the most popular methods used by traders and analysts today.
Is it possible to predict the stock market
Before we even begin discussing the feasibility of predicting stock movement, we first need to establish if it is possible to predict the stock market. This is because different stocks are traded, and they all make up the stock market.
To begin with, no one can predict the stock market as it is impossible to do so. However, there are signs traders look out for in order to predict the movement of stock prices. They also watch out for the level of risk when making stock price projections. By analyzing the risk level associated with stocks, investors can decide which stocks are worth investing in and how much investment they should put into a particular stock.
The reason why risk factors are so crucial is that markets are very inefficient. Stock traders know this, so the idea is not to eliminate risk since every asset known to man have some level of risk. However, investors fish out the safest ways to make a profit from trades while assuming such risks. For example, assets like company stocks, options and many other ETF’s all have risks, but traders can buy many of them and sell them at a future date after they appreciate slightly.
So as a matter of forensic evidence, no one can truly predict the stock market; however, there are trends and signs that traders or investors can Identify to help them make projections about stock price movement.
Factors that affect stock prices
Stocks don’t exist in a vacuum but are influenced by several underlying factors that cause their prices to rise or fall at every point in time. There are instances when a stock price will even stabilize and remain the same for quite some time. Let us take a look at some of these factors
Supply & Demand
The economic law of supply and demand influences every economic activity we undertake as humans, and this law is very active in the stock market. If the price of a stock begins to climb, experts rightly assume there are more buyers than sellers in the market. If the price of the same stock begins to fall, they change their stance since there are more sellers the buyers. The economic dynamics of this law is very simple.
Prices of stocks are influenced by the demand for them as well as the supply. So you have the bid price, which is the price buyers are prepared to pay for the stock and the asking price the sellers are willing to pay. So in a situation where there are more sellers in the market looking to sell that particular stock, the bid price will become the selling price because there will be more sellers in the market than there are buyers.
This will create a perfect market condition for buyers who now have the luxury of multiple sellers. As more sellers find it hard to sell their stocks, they will be forced to bring down their prices to attract buyers.
Company Financials
Another factor that can influence the price of a stock is the financial fortune of the issuing company. While supply and demand are influenced by two polar endpoints, the demand for the stock is influenced by the actions or fortune of the issuing company. Under company Financials, the factors that influence price are the trading profit and loss accounts of the company and consistent progress over a period of time.
In the case of trading profits, once a company releases an IPO and becomes a publicly traded company, it is required by law to publish its financial records like its Trading Profit and Loss Accounts, Balance Sheet and other financial documents. Investors rely on this data to determine how much their stock is worth. A company that earned a good profit for a trading year will likely pay dividends to shareholders. This is seen as a good sign by investors who may want to buy their shares. In the same vein, existing shareholders who just received dividends may not want to sell theirs, creating an over-demand for the stock, which will send its price soaring.
Furthermore, the business’s success over a long period of time can also be seen as a good sign to prove the strength of the company. Common factors besides profits include
- Quality management
- Introduction of a new product of value
- Stability
- Expansion of market reach
And many other factors.
General economic factors
General economic factors that are not under the purview of management boards can also influence stock prices. On a micro-economic scale, there are certain factors a company will have to deal with, such as employee performance and turnover. However, macroeconomic factors are not within their sphere of influence. These factors may affect the entire industry on a wide scale. Common examples are as follows.
Recession
If the economy is in a recession, there is very little decision-makers in the company can do to insulate itself from risks. In a recession, every business suffers one way or another as investor confidence is low and owners of capital hoard what they have for fear of losing it. First, this creates difficulty for publicly traded companies as most stockholders will prefer to dump their stocks and cash out, leading to a price free fall with so many sellers in the market and very few buyers. Secondly, profits will tumble as sales decline, forcing more investors to lose faith in holding onto their stocks.
Industry shocks
If the industry in which the company operates is impacted negatively by a natural disaster or a manmade event, for example, this will influence stock prices. To buttress this point, we provide two clear examples. First, natural disasters like hurricanes influence the stock prices of real estate and construction companies more than anything else. If a hurricane hits an area where there are predictions that one is coming, stockholders of real estate companies will want to sell off their shares quickly because the news or outcome will create a panic.
No one wants to live in a hurricane-prone location forcing the prices of houses in the area to crash. The stock prices of real estate companies will also take a hit since there are more sellers than buyers in the market.
On the flip side, we just witnessed the economic effects of the global pandemic of 2020, which adversely affected many industries and businesses within them. However, while real estate firms, construction firms, restaurants and hotels, education and many other service sectors suffered, the health Industry witnessed a boom. In addition, the uncertainty caused by the pandemic had an economic effect on the industry as many more people begin to take their health seriously.
This led to many health service providers and manufacturers posting good profits for the year as there was a high demand for not just their products and service but their stocks as well. We saw the same boom in the delivery and logistics industry as many came to rely on their services to get essentials since they couldn’t leave their homes. Even E-commerce platforms saw the value of their businesses increase during the period.
How do you predict stock movement?
How then do you predict the movement of stocks? Here are some proven ways investors have done so for years
Momentum
One clever way they have been able to do this is to use momentum. In forex trading, it is called the trend, but momentum and trends are one and the same. The general assumption of momentum speculation in stock trading is that once a stock begins to move towards a particular direction, it often maintains the same movement until the end of the trading day. Although this concept is not perfect, it pays credence to irrational human behavior regarding finance.
If the price of a stock is falling, the number of buyers and sellers are never the same, and their actions are not always mutually exclusive. So investors rely on momentum to predict stock movement and decide whether to buy the stock or sell the volume they own.
Mean Revision
Another way to predict stock movement is the use of mean revision. Mean revision as a concept is best understood by experienced investors than young investors with minimal knowledge about how the stock market works. As you may already know, all traders never respond to changes in stock prices the same; however, one phenomenon holds. That high prices discourage many investors from buying stocks, while low prices attract buy orders. So what is revision?
Revision is the average value of a stock price over a period of time. What this means is that after buyers first indicate their bid price (that is too low for sellers) and sellers indicate their asking price (that is too high for buyers), the price of the stock will consolidate and settle somewhere in the middle unless an external factor like an economic trend causes it to change course. Mean revisions cause changes in business cycles, so many investors rely on revisions to determine stock movement.
Martingales
Martingale is a series of mathematical numbers used by market analysts to predict the next number using the current number. This mathematical concept found its way into stock evaluation after the theory was propounded by Paul Samuelson in 1965. The foundational basis of Martingales is that stock prices are not influenced by past trends in an efficient stock market. Investors who use this formula to predict stock movement view prices as Martingales. So, rather than use past trends to predict future prices, they use current trends and market situations to make price projections for the future. These investors use
- Current price volatility
- Current market indicators
- Present Economic/company realities
To predict where the market is moving towards. So, in essence, the best way to predict tomorrow’s stock price is to use today’s price with slight adjustments for an increase or decrease. Thus, martingale investors focus on the current risk in play when they buy and sell stocks rather than historical data.
Value Search
Another option you can use for stock movement is to search for value stocks to buy at the present time with a plan to sell for a much higher price. Investors who invest based on this logic are called value investors, and they search for underpriced stocks that will adjust over time.
Based on historical data, most price analysts have come to agree that stocks are underpriced from time to time based on current market realities because markets are hardly ever efficient. However, they rarely remain so for very long but adjust to their real price over time. The argument remains as to why this happens, but one thing that all investors agree on is that a valuable stock will not remain underpriced for too long.
These 4 methods are time-tested methods for predicting stock movement; however, they represent a challenge for inexperienced traders. But it will interest you to know that this is not the only way to predict stock movement. There are stock price research websites you can rely on.
Best Stock Research Websites
Some websites publish an updated list of stock prices for blue-chip companies and many other companies that are not even blue-chip. The data they publish is analyzed by experienced market analysts with a certain degree of price accuracy. There are so many of them, but here are a few
- Motley Fool
- Morningstar
- WallStreetZen
- Seeking Alpha
- American Association of Investors
- Google Finance
- Yahoo
- Zacks
Conclusion
Stocks are influenced by several factors, and understanding these factors is a first step to predicting their prices. In this article, we have reviewed four key ways to predict stock movement, and some of them involve the use of indicators. For best results, simply use the method that works for you.