If you are a stock trader, a broker or an individual planning to make an investment in the stock market soon, then you must have experienced or heard that timing matters a lot in this kind of business. As the market prices keep continuously fluctuating, you need to be diligent and watchful at all times of every minutest detail, which may affect the stock market performance.
There are certain factors that greatly influence the stock market performance. Among them, the major determinants can be broadly categorized into two types: fundamental factors and technical factors. The former include indicators such as the Earnings per Share (EPS), which the company earns for its stockholders and the Price/Earnings Ratio (P/E Ratio) that reveals the amount each investor expects to earn through investing in the stock of a specific company. In order to find out how much funds one should invest in a stock to add to his or her wealth, investors usually discount the expected earnings a stock is expected to generate to calculate present values.
Technical factors are the external factors that affect stock prices and stock market performance. These include inflation, economic performance of the market and key competitors, alternative investments/substitutes, incidental transactions based upon insider knowledge or with a view to hedge against risks, demographics, trends, liquidity and market sentiment. Stock prices, especially in the short term, are affected greatly by non-financial factors such as investor motives and sentiments, which may be greed, herd behavior, etc.
The decision as regards whether or not to buy, sell or hold a stock can be taken by keeping in view certain key areas of a company’s performance vis-à -vis the performance of the overall economy. A potential investor should read the quarterly press releases because they contain vital information regarding the factors that have impacted the stock performance of a company and try to find out whether they will remain relevant in the future or not. The first area to look at is sales. If the sales revenues of the company are growing, it is a sign that the company will continue performing well in the next quarters as well and record gains in its EPS.
A positive change in sales revenue is not enough; what matters more is profitability. Answers to questions like whether the profit margins are increasing or decreasing can be found by looking at the quarterly reports that a company publishes. Investors are paid never out of the revenues but profits, and that is why the latter matters a lot. For more than profits, one must pay attention to statements of cash flows.
Another important area to cover is for the potential investor to try to find out if the company intends to buy back its shares in the future. If it does, then it will cause the EPS and stock prices to spike thus resulting in both revenue and capital gains for the investor. If the company plans to offer its shares for sale to the public, it is a bad sign for the investors, as it will decrease both EPS and share prices.
Technical indicators, which can help ascertain the future market performance of a company, include moving averages volumes and 10,000-foot view. Furthermore, figure out if the stock trading is above or below the moving averages, has its trading volume increased or decreased, and also see the macro-economic indicators such as fluctuations in the interest and exchange rates, fiscal and monetary policy and their impact upon the earnings and market performance of the company.
Analyzing a company by keeping in the view of the performance areas listed above should help both investors and their brokers make a financially correct decision. Any rash decisions based merely upon one’s whims and wishes may work once or twice but most of the times they result in losses. Proper decisions must be based upon the fundamental and technical factors as well as indicators.
