How do you know the stock will go up?-WWNEED.COM

 How do you know the stock will go up?-WWNEED.COM


Stock prices rise and fall based on supply and demand. When people want to buy a stock instead of selling it, the price goes up, and similarly if people want to sell the stock instead of buying it, the price goes down. However, predicting whether there will be more buyers or sellers for a particular stock requires careful research. Buyers are drawn to stocks for a number of reasons, which may be a drop in valuation, new product lines, or even market noise. If you are wondering how you know the stock will go up, then read this article.

What makes the share price go up?

Sellers indicate the prices at which they are asked to give up their shares, and buyers similarly indicate the prices at which they are willing to buy the shares. This is known as the bid-ask spread. Supply refers to the number of investors willing to sell their shares, while demand refers to the number of investors willing to buy shares. When more buyers are willing to pay the seller's asking price than sellers are willing to ask, the share price will go up. 

Here's a simplified example of how supply and demand works in the market:

Buyers

Investor A offers $10 to buy a stock.
Investor B offers $10.10 to buy a share.
Investor C offers $20 to buy a stock.

sellers

The investor asks for $10 to sell the stock.
The first trade occurs at $10.10, when Investor B buys from Investor E.
Investor D asks for $20 to sell the stock.
This transaction occurs when Investor C enters the market and pays $10.20.

This shows how investor demand can push up the stock price, and thus how you know the stock will go up. After the first trade at $10.10, no more sellers will be willing to accept such a low price. The next trade occurs at $10.20, as the demand for a higher price exceeds the sellers' willingness to accept a lower price.

What makes a stock more valuable?

High demand is what actually drives up the share price. Valuation is one of the main factors driving demand. Companies can be valued in many different ways, but earnings per share, which represents a company's profitability, and the price-to-earnings ratio, which compares a company's share price to its earnings per share, are two common factors in the equation.

Earnings per share represent the company's profitability, and it may also be used to compare the company to other companies in a particular industry. If a company in the same business is making twice as much profit as a competitor, for example, it is more likely to attract investor interest.

Earnings per share is calculated by dividing the company's profits by the number of its outstanding shares. If Company A made $1 million in profits last year and also has 1 million shares outstanding, the earnings per share will be $1. And if she made $2 million in earnings this year and had 1 million shares outstanding, her earnings per share would be $2.

Compare that to Company B, which had $10 million in earnings last year with 20 million shares outstanding, giving it only 50 cents in earnings per share even though it made more money than Company A. If Company B had $15 million in earnings this year with 20 million shares outstanding, its EPS would be 75 cents. Despite having higher profits last year and a larger increase in profits this year, Company A is rated higher because the EPS is higher. In general, investors are more interested in companies with increasing profits.

What makes a stock go up or down?

Although factors such as earnings per share and the price-to-earnings ratio are standard measures of valuation, there are many other factors that can affect how you know a stock will go up or down. Here are the most important ones:

Technical factors

A large segment of market participants use market data to decide which stocks to buy and when. Technical analysis relies solely on price movements, and investors often track them on charts that provide insight into how a stock's price is moving.

Technical analysis makes three hypotheses:

The share price reflects all information related to the security
Prices move according to trends
The past movement can predict the future movement

external events

Sometimes, valuation, technical analysis, and other factors don't matter as much as global events. In times of extreme fear or panic, such as after 9/11 or when the coronavirus has become a global pandemic, markets tend to sell off, regardless of valuation or earnings. In times of optimism, stocks tend to trade, even when they are considered overpriced by conventional standards.
macroeconomic environment

Economic factors that are likely to hurt corporate earnings also lead to lower share prices. Inflation is one example. Historically, inflation has always pushed down stock prices, because inflation causes prices to rise, which makes it more expensive to run a business.

Current market trends

In a strategy known as momentum investing, investors follow market trends to identify stocks rather than relying on other traditional valuation metrics. Investors try to spot trends early to make the most of the rally, and to reduce the time it takes to sell a stock on a decline. This strategy can be a bit choppy, as it amounts to market timing, but you can always use tools like stop-losses to offset some of the risk.

How do you know the stock will go up?

Despite all the ways to value stocks, the truth is that no one can say with absolute certainty when a stock will go up or down. Your best bet when looking for stocks that will go up is to evaluate the factors that tend to drive up prices, including:

  • Supply and demand
  • Evaluation
  • Technical factors
  • external events
  • macroeconomic environment
  • current market trends
You can also use these factors to help you know when to sell a stock.

What affects the share price?

Higher demand for a stock causes the share price to go up, but what causes this high demand in the first place? It's all about how investors feel:

Market sentiment towards stocks.
Market sentiment towards the industry.
Market sentiment towards the stock market.
Confidence in the economy.

The more confident investors are about a company's prospects or the potential for positive developments, the more likely they are to acquire shares. On the contrary, the loss of confidence in investors can lead to a decision to sell, which leads to a decline in the share price.

Factors that can affect sentiment towards stocks include quarterly earnings reports that beat or fall short of expectations, analyst promotions, and business developments both positive and negative.

Stock demand can also be affected by sentiment towards a particular industry. An electric car company could see its share price rise as investors continue to buy heavily. This is because they are confident in the future of the electric car industry. But if investors feel distrustful of an industry, every stock in that industry may suffer regardless of the performance of each individual company.

Confidence in the stock market can also increase demand and prices for individual stocks. If investors think stocks are a good investment, either because valuations are attractive or because the stock market is trending higher, increased demand for stocks may push prices higher across the board, and vice versa, as a stock market decline can shake investor confidence, and thus more supply and lower stock prices.

Opinions about the path of the economy also play a role in determining how you know a stock will rise. Investors may sell some stocks in anticipation of an economic slowdown, but on the other hand, the widespread belief that the economy is recovering or booming can lead to an increase in demand for stocks.

Why do stock prices change every second?

Stock prices are pushed up and down in the short term by supply and demand, and the balance of supply and demand is moved by market sentiment. But investors don't change their minds every second, so why do stock prices change so quickly?

The current share price is the price at which the last transaction occurred. For many stocks, transactions occur every second the stock market opens. Investors trade an average of 90 million shares of Apple (NASDAQ:AAPL) each day. The share price changes to reflect the most recent transaction price each time a block of shares is bought and sold. The sheer number of transactions keeps the stock market volatile every second, even if there is no change in market sentiment.

Summary

Long-term investors are not interested in the short-term developments that drive stock prices up and down each trading day. When you give your money years or even decades to grow, analyst reports and earnings beats are often fleeting and irrelevant, and all that matters is where the company will be five, 10 or 20 years from now.

The long-term value of a stock is related to the future cash flows that the company generates. Investors who believe the company will be able to increase its earnings in the long run or who believe the stock is undervalued may be willing to pay a higher share price today, regardless of short-term developments. This creates a stream of orders that can push the stock price up or prevent significant declines.

While many people try to cash in on those short-term moves, investors should focus on the long-term, i.e. the company's ability to grow its earnings over many years.

Disclaimer: The content of this article is for informational purposes only. The information provided should absolutely not be considered as investment advice or a recommendation. No warranty is made, express or implied, as to the accuracy of the information or data contained herein. Users of this article agree that Money Secrets does not accept responsibility for any of their investment decisions. Not every investment or trading strategy is suitable for anyone. See the risk warning statement.

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