Understanding THIS Can Increase Your Profits
How do traders and investment firms predict which stocks will pay off big? How do they know when to buy and sell?
Unfortunately, there’s no simple way to predict the behavior of the stock market. A number of factors cause rises and falls in share prices through gradual changes or sharp spikes.
The best way to understand how the stock market fluctuates is to study trends of individual stocks and broad market behaviors.
How to Understand the Stock Market’s Behavior
Before you can understand the behavior of stocks, it’s important to understand the market. What is the stock market, exactly? It’s an equity market that provides a place for businesses to gain investors and to ideally create growth.
Since it’s so tied to business and industry, there are a number of different things that can affect the market.
Importance of Learning About Stock Movements Before Investing
Say that you have a friend who wants to place a wager on a game of Monopoly. Trouble is, you’ve never played Monopoly in your life.
You’d probably say no to betting on the game because you’ve never played before and you don’t know the rules. Betting money on it would be stupid until you learned how the game worked!
Yet new traders do this very thing on a daily basis. It’s not uncommon for a new, uneducated trader to enter the market like it’s a game, foolishly betting their money without knowing what they’re doing. And they tend to lose money fast. It sucks!
Before you begin investing your hard-earned cash, learn about what makes stocks move. This will make your trades tactical and well thought out, rather than like playing a slot machine or betting on a game you don’t know how to play.
Understanding Stocks: Factors That Influence Individual Stocks
Some factors can have a big effect on individual stocks. In the large scheme of things, these factors may not shake the market at large but may have a deep impact on a particular sector or a particular company.
Here are some of those factors:
Factor #1: Corporate Actions
Consider the company offering the stock in question. What’s their story? What’s going on in their company right now? Changes in the corporate structure, business model, or operations can have a big effect on individual stocks:
Public Opinion vs. Stock Price
If the public opinion in a company is generally high, the stock price tends to go higher. This could be due to good news, a great new product, a big new partnership, or other factors.
On the flip side, if a company goes down in public opinion, the stock price tends to go down, too. This could be because the company is involved in a scandal, the industry is experiencing a downturn or becoming obsolete, a contract key to their business was not renewed, and so on.
To offer an example, say Company A’s CEO steps down. If he or she was doing a great job, the public opinion could go down, meaning that the stock price could suffer.
On the other hand, if the CEO was not great and a big new name is stepping in, it could increase public opinion and increase demand for the stock.
Either way, everyone will be looking at what happens next!
Traders’ Emotions Vs. Stock Price
I’ve written before about trading psychology and how it can affect your actions as a trader. Company developments can also have a deep impact on traders’ emotions, which can affect the stock price.
Corporate happenings such as reorganizing, mergers, and other major structural changes can impact the demand for a stock, which can drive its price up or down depending on whether the reaction is positive or negative.
If a company’s change inspires hope on the part of investors, it can drive up the price of the stock, even before anything happens.
If a company is making a change that inspires fear or seems unknown, it can make the stock price go down, because no investor likes to add uncertainty to an already inherently risky market.
Factor #2: Earnings
A company’s earnings can also have an effect on stock price. Usually, the direct effects are limited to a particular company or sector, though, versus the market at large.
Influence of a Quarterly Earnings Report
A company’s earnings reports can be extremely helpful when you’re trying to narrow down choices for stocks to trade.
In particular, you want to compare the company’s earnings to its prior earnings. So, for instance, you might do a side-by-side comparison of this quarter versus last quarter.
If the profits are higher this quarter than last quarter, this is seen as an indication that the company is doing well. Even if it’s small and potentially short-term growth, it can drive the price upward as more investors want a piece of the profits.
The opposite is true, too. A decrease in sales this quarter versus last quarter can look to be a sign of trouble in the company. Investors can lose confidence in the company and its stock, driving down demand, which drives down price.
Factors That Influence the Whole Market
While some things will only affect individual stocks, there are other factors that can cause much bigger ripples in the entire market.
These are some of the more global factors that can contribute to stock behavior across the board:
Factor #1: Inflation
Inflation is defined as “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”.
To a certain degree, inflation is natural. But sometimes, the volume of money and the market aren’t totally aligned.
In this case, an increase in inflation can have a negative effect on stock prices. Higher inflation can result in a decrease in a company’s stock price.
Lower inflation can have the opposite effect, making stock prices go up.
Factor #2: Interest Rates
Are interest rates on the rise? This could play into stock movement.
An increase in interest rates will lead to a decrease in the stock price because higher interest rates are generally viewed in a negative light and will take up more cash that could otherwise be used for investments.
Lower interest rates, on the other hand, can be a good thing — they can lead to overall increases in stock prices.
Factor #3: Oil Prices
Oil prices are one of the markers that you can look to if you want to determine the tone of the market. Historically, the stock market has reacted negatively to higher oil prices. Inversely, if oil prices go down, the stock market tends to react favorably.
Many industries rely on oil, so it can have bigger effects than just the price of oil itself: it can affect companies in a big way. This means that by looking at if oil prices are trending up or down, you can get a quick pulse on the market.
Factor #4: International & Domestic Stability
Instability in the nation can be a factor in market movement. War, crime, fraud, domestic or political unrest, terrorist attacks, or scandals can affect the market in a negative way.
When things are domestically stable, it can have the opposite effect on the market.
Understanding stock movements and fluctuations in the market is critical for every investor, especially if you are new to trading.
In this issue, we covered many different factors that play into these movements, each with its own cause and effect.
But what happens when all of these factors are combined?
Tomorrow we will discuss what you should do when the entire stock market experiences a downward shift, and how the type of market in which you are investing can give you clues about how to act on these trends.
— Tim Sykes
Editor, Penny Stock Millionaires