Hello! This article will uncover some techniques or methods that may help an investor predict the stock market. It is a fool’s game to try and predict the stock market for certain. No tool or method, or technique is there in the world that can accurately predict the stock market.
According to Burton Malkiel, every movement of the stock market is nothing but a random one. No one can predict the stock market for certain. Although, there are ways to make a profit after analyzing the data of a company. Other ways include the illegal practice of insider trading, by which one can learn of any upcoming events which will benefit the company’s share price.
Let us talk about the first one, though.
- This method is used by what we know as fundamentalists. Around 90% of investors in the stock market are fundamentalists. They believe in the company’s performance; they believe in facts and data of the company, rather than trying to predict future movements like technical investors.
- They use the intrinsic value to predict the short-term movements of the price of the share. An intrinsic value is nothing but the actual value of the share, evaluated by using fundamental methods. This value varies from the share’s CMP.
- If the intrinsic value is greater than the CMP, then it is likely that the CMP will increase till its intrinsic value. If the intrinsic value is smaller than the CMP, then it is likely that the CMP will decrease till its intrinsic value.
This is just on theory, though; it may not be the same for certain in real-life conditions. Investors target those shares which are priced below their intrinsic values. You can learn all these things in detail by joining a good stock market course.
There is also a calculating the ROA and P/E ratio. ROA is the return on assets, and P/E is the price-to-earnings ratio.
- P/E is a ratio used to calculate the cost incurred to earn a single unit of money. This ratio is important to know the break-even point for any business. Also, this share reveals that how much money shareholders are willing to pay for a single unit of the company’s earnings.
SHARE PRICE/EARNINGS PER SHARE
- ROA is the ratio used to calculate the profitability of any business based on its assets. This shows how good and efficient the company is at managing and using its assets.
NET INCOME/ASSETS
Both these ratios are fundamental to know to decide the future of the company. A low P/E matched with a high ROA is the best. Invest in that company immediately. This method is based on Greenblatt’s magic formula.
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The next method is quite simple and basic. It goes by the name of momentum. It is the belief that the way a stock market is going (either rising or falling) will continue in that way. In simple terms, people will buy only that rising stock, which will lead to a single monotonous trend of everyone buying it, which will lead to a growth spiral.
It’s classic human psychology.
So, according to the concept of momentum, the stock that has performed well over the past months is likely to perform good for the coming few months as well. And on the other hand, a stock that is not performing for months will not perform in the future.
There are many other methods and techniques that you can apply to achieve short-term predictions, but they are not 100% accurate. The only guaranteed way of getting a return is to systematically invest in a self-made portfolio over a long time. It is guaranteed in an equity market.
That being said, the other method is inside trading, which, unless you know someone at the top of the company or you are at the top, is unlikely to happen.
This was it for now. I hope you learned something from the article. I suggest some stock market courses learn more about it. There are many great stock market courses out there, but The Thought Tree provides the best, according to my experience.
Thank you for reading my article. I appreciate it.
