9 Tips On Predicting The Ups And Downs Of Stocks: A Beginner's Guide
Here are nine factors you should look at when trying to decipher where stock prices are headed
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Whether you are someone new to the stock market or a veteran, eventually all that number crunching boils down to one thing: the ability to insightfully predict the ups and downs of the price of a stock so you can buy or sell in a manner that maximises your returns. It’s not luck as much as being able to try and attempt to understand future movements through knowledge and historical data. As much as it’s tricky to forecast where stock markets are headed—at times even for experts—understanding certain concepts can be a definite plus for beginners. Here are nine factors that help you improve your financial market knowledge and make better trading decisions.
As a speculative asset, stocks have a propensity to be overpriced, and overpriced stocks will eventually fall. To judge the direction the stock may go, one needs to check whether a stock is overpriced or under-priced by calculating its price/earnings ratio. The P/E ratio is calculated by dividing the share price by earnings per share. A high P/E indicates that a stock may be overvalued and due for a correction, while a low P/E means that a stock may edge higher as its price is low relative to earnings.
Earnings growth and forecasts
Steady earnings growth is one of the primary drivers of stock price. If a company has posted earnings not just in the last few quarters but consistently over a longer term, such as five to 10 years, it’s fairly safe to say its fundamentals are strong and the stock is likely a good long-term investment. Similarly, if a company has a positive earnings outlook, its stock is quite likely to witness gains, and vice-versa.
Trading volume has historically been an indicator of investor interest in a stock. However, an even better metric is delivery percentage, calculated by dividing the deliverable quantity by total traded quantity. For example, if a stock had a traded quantity of 10,00,000 shares and deliverable quantity of 6,00,000 shares, its delivery percentage is 60 percent. A higher percentage is better since it means more investors are ready for delivery and chances of future profitability are higher.
FPIs, FIIs, and DIIs
A major chunk of investment in the Indian market is dominated by foreign portfolio investors (FPIs), foreign institutional investors (FIIs), and domestic institutional investors (DIIs). When FPIs, FIIs, and DIIs are buying stocks, market indices like Sensex, Nifty, etc. stay bullish, and when they sell, indices usually fall. Their net investments and buy-sell moves can help predict where a stock will go and can even by imitated by retail investors provided you understand that there are risks involved too with such a strategy. Constituent stocks can be bought or sold by tracking FPI, FII, and DII movements through the NSE website.
Stock prices are routinely affected by the trading of mutual funds. Because mutual funds are substantially invested in stocks, they have both short- and long-term price impacts. If a mutual fund increases its holding in a stock, its price is likely to rise, and vice-versa.
An increase/decrease in promoter holding should be looked at while anticipating the direction a stock will take. Increasing promoter holding leads to rising investor interest, which bodes well for stock price. Contrarily, decreasing promoter holding is likely to be taken negatively, and the stock price may fall on account of selling.
While markets tend to even out in the long term, stocks tend to follow the momentum in a rising or falling pattern in the short term. The idea is to avoid fighting this momentum and invest in stocks that are rising and avoid those with a bearish outlook. If a stock’s price been climbing and fundamentals are strong, it will likely rise in the near future unless the climb is too steep and it’s due for a correction; the reverse is also true.
A moving average is extremely useful in reviewing a stock’s performance over time. Stocks can be volatile in the short term, so it’s necessary to get a long-term insight. By taking a time period of 15 days, 30 days or six months, the moving average gives the average price of the stock for the period and an indication of where the price is headed.
If the company possesses a strong competitive edge or its business model is difficult to replicate, its stock price is likely to stay strong. Brand equity, research wherewithal, ability to constantly innovate, and overall business excellence are some advantages that should also be looked at when predicting how a stock will move in the future.