What determines the stock price?

What determines the stock price?

By Reynor Buenaflor

http://ebookwormonline.blogspot.com --> Feed your mind! You are what you read.

Ever wonder what causes the stock price to go up and down? Is it the economy? Is it the value of the company? Is it the inflation? Is it the perception?

I don't want to sound oversimplifying things. Looking at it in the economic perspective, it is the law of supply and demand that determines the price of the stock at the end of the day.

In the stock market, our trading commodity is the stock of companies. When the demand for a certain stock is great, the price of the particular stock tends go up. When a significant number of shares are bought, the price goes up. When the supply of a particular stock is great, the price goes down. When a significant number of stocks are sold, the price goes down.

In the volatile world of stocks, the bottom line is the law of supply and demand. The more the investors are pouring in and buying in stocks, the price goes up. The more investors are uncertain and selling shares, the price goes down.

As to what influences the majority of investors whether they are in the selling mode or buying mode is a different story. A lot of factors are involved logic, anticipation, hope, greed, fear and sometimes news.

Thus, the key to becoming a better investor is to know the sentiment of the market and to use the law of supply and demand to your advantage.

There are two body of knowledge that encompass in determining the market sentiments. Of course, they could not predict the market 100% of the time but knowing them will give you some advantage.

The fundamental analyst looks at the fundamentals of the company. They believe that when the company financials are good, the company is earning well, and the stocks are cheap, there is no other way but for the stocks to go up and vice versa. For a bad company with an expensive stock, the stock will go down.

On the other hand, the technical analyst studies the chart of the stock price. They believe in trends - the uptrend, the downtrend, and the sideways also known as the consolidation and make investment decisions based on the trend.

These are just tools. The better you understand them and use them; the better is your chance in the market.

P.S. Before putting your money in the stocks, do your research. Stock market can be unforgiving when you don't know what you are doing. According to Warren Buffet, if you don’t know how to put in paper why you are making your investment, then you think again before you invest.

Fundamental Analysis Tools

Fundamental Analysis Tools

There are several computations that we can check to see the soundness of the financial statement of the company.

Companies are required by the SEC to submit financial report for the shareholders to view. They are available to shareholders for viewing.

Noteworthy to note are measure of liquidity, measure of debt, profit, operating performance, cashflow and the value of the price of company stocks per share.

Fundamental and Technical Analysis

FUNDAMENTAL AND TECHNICAL ANALYSIS

Putting your hard earned money in an investment without a tool is like placing it as a casino bet where you have no control and leave the result to luck.

Let us take up the tool / ratio used by investors.

We have two tools.


1) Fundamental Analysis
2) Technical Analysis

Fundamental Analysis is a strategy where stocks are picked based on the value of the company and how good is the financial performance of the company doing.

Technical Analysis is a strategy where stocks are picked based on the movement of the price of stocks on the market. This is where the market trend is determined. Is it uptrend? Is it downtrend?

Bear market

BEAR MARKET
(Excerpt from Wikipedia)

Editor's Note: (Knowing the market trend and determining whether it is a bull market or bear market is crucial in making investment decisions. In layman's term, bull market is when the stock market price is going up and bear is when the price is going down).

A bear market is described as being accompanied by widespread pessimism. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history was after the Wall Street Crash of 1929 and lasted from 1930 to 1932, marking the start of the Great Depression. A milder, low-level long-term bear market occurred from about 1967 to 1982, encompassing the stagflation economy, energy crises in the 1970s, and high unemployment in the early 1980s.

Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time.

According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period." However, no consensual definition of a bear market exists to clearly differentiate a primary market trend from a secondary market trend.

Investors frequently confuse bear markets with corrections.

Corrections are much shorter lived, whereas bear markets occur over a longer period with typically a greater magnitude of loss from top to bottom.

Bull Market

BULL MARKET

Excerpt from Investopedia...

Editor's Note: Stocks can be overwhelming to a new investor due to unfamiliar terms.
Investopedia gave a good definition of bull and bear market.

Bull simply means the price of most of the stocks in the stock market generally is going up. While bear simply means the price is going down.

	A financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.
	Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. It's difficult to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets. The use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.

Types of Investing

Editors Note: Any worth doing investment needs to have a good plan.
There are two kinds of investors. Passive Investing and Active Investing.
Depending on the amount of time you have at hand and the expertise you have you may choose to a passive or an active investor.

From investopedia... Definition of the the two general kinds of investing are the following:


Passive Investing

	An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.
	Also known as a buy-and-hold or couch potato strategy, passive investing requires good initial research, patience and a well diversified portfolio. Unlike active investors, passive investors buy a security and typically don't actively attempt to profit from short-term price fluctuations. Passive investors instead rely on their belief that in the long term the investment will be profitable.

Editor' Note: To get involve in passive investing is to do an initial research on the fundamental and technical analysis of stocks that the passive investor believes to increase in the long run.
Since the investor will not be actively involved and leave his investment for a long, he needs to remember two things:

1) Don't buy stocks you are not familiar with. Go for household names you love and you know is making a lot of sales.
2) Use cost averaging method, buy same amount of stocks (note: not same number of shares but the same amount whether the price goes up or down) on a periodic cycle (ex. monthly, quarterly).
3) Do it long term... It should go through several cycles of bull and bear market.


Active Investing

	An investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions.
	Active investing is highly involved. Unlike passive investors, who invest in a stock when they believe in its potential for long-term appreciation, active investors will typically look at the price movements of their stocks many times a day. Typically, active investors are seeking short-term profits. Editors Note: To be involved in active investing, an investor needs to have financial literacy. Stock market is volatile and can be unforgiving. It can wipe out all your investment. Don't invest without doing research. Stock market is not a casino. You should begin with a consistent strategy on entering and exiting the market. You can get money both in a bull market and in a bear market. However being a conservative investor, I get involve only during the bull market. "When the tides rises, the ship goes up". Still I buy only sound stocks with good fundamental and technical analysis. Next blog we will define bull market, bear market, cost averaging, strategy, fundamental analysis, technical analysis. Editor's Note: Please do your research before making any investment.

What is Stock Market?

Stock market

Excerpt From Wikipedia, the free encyclopedia

Financial markets

A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately.

Editors' Note: In layman's term, it is a place where people buy and sell from each other products. The product is no other than the stock or the ownership of a certain company.

The Definition

The expression 'stock market' refers to the market that enables the trading of company stocks (collective shares), other securities and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market.

Editors' Note: In layman's term, bond is simply a loan you give to the company that will be paid to you for a length of time at a certain agreed interest.

Editors' Note: Stocks on the other hand is your investment to the company. You are purchasing a part ownership of the company upon buying stocks.

Commodities are traded in commodities market, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter').

The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion 'face' or nominal value, 30 times the size of the U.S. economy…and 12 times the size of the entire world economy.

The stocks are listed and traded on stock exchanges which are entities specialized in the business of bringing buyers and sellers of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges. European examples of stock exchanges include the Paris Bourse (now part of Euronext), the London Stock Exchange and the Deutsche Borse.