Stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy.
What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies. That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth.
Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1,000,000 shares outstanding has a lesser value than a company that trades at $50 but has 5,000,000 shares outstanding ($100 x 1,000,000 = $100,000,000 while $50 x 5,000,000 = $250,000,000).
To further complicate things, the price of a stock doesn't only reflect a company's current value--it also reflects the growth that investors expect in the future. The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, they aren't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).
Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall. Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price).
It would be a rather simple world if this were the case! During the dot-com bubble, for example, dozens of Internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most all Internet companies saw their values shrink to a fraction of their highs.
Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the P/E ratio, while others are extremely complicated and obscure with names like Chaikin Oscillator or Moving Average Convergence Divergence (MACD).
Monday, July 21, 2008
Market Trends - Bulls, Bears, Rallies, and Corrections
History has proven that investing in stocks yields more profits than most other investments. When an investor has money to invest, he needs to understand what the experts or analysts mean when they say bull market, bear market, or a correction. Understanding the meanings of different market trend expressions helps to plan personal strategies.
Paying attention to general market ups and downs produces better opportunities for the average investor and eliminates the risks of panicking when the stocks take a downward direction. Technical analyses of markets show that markets, in general, move in trends. Primary market trends are bull markets and bear markets. Secondary market trends are rallies and corrections.
When the buying of stocks outnumber their selling consistently, the market during that period of time is called a bull market. Also, investors or analysts who are optimistic on the markets' performances are said to be bullish. An analyst may be bullish on one sector like the oil stocks and not so on technology stocks or he may be bullish on the general direction of all markets. A rise in the markets over a short time like a few days is called a bull market rally.
A bear market happens when the general markets show a sizeable drop over a long period of time; that is more than a few months. This may mean the investor confidence is broken and the selling is much more than the buying of stocks. After the Great Depression, a bear market lasted for two years, resulting in high unemployment.
Analysts and investors who become pessimistic and think that the markets indicate a falling trend are said to be bearish. A sudden drop in the markets over a short term is called a bear market rally.
Bear market rallies come about abruptly and may cause panic among the investors. If the panic and pessimism continues, this may lead to recession, which means a significant decline in the economic activity of an entire nation. This behavior of the investors may cause a general market crash, like the one in 1929 that led to the Great Depression with an international outcome. The 1929 Market Crash came about when the bull market that started in 1920 came to an end.
The international crash or the panic selling in 1987, called the Black Monday Crash, however, did not happen because of recession. Although no one is sure why it happened, it started after the falling of the US dollar and trade deficits.
A correction is quite different than a crash, because it takes place after a bull run and lasts for a short time. The drop is more than 10%, but less than 25%. The correction in the markets is an opportunity for the savvy investor to buy stocks at a lower price. On the other hand, thinking that a bear market is only a correction can lead to disappointment.
When a market trend stays over a longer period of time measurable in years, it is said to be secular. Secular bear markets take the prices of the stocks to even lower levels than when the bull markets started.
No reliable method exists to forecast the market trends before they happen. Analysts and economists draw fancy charts and try to connect the trends to one reason or another such as the value of dollar, world events, or politics; however, none of the predictors has been consistently correct.
The best way for an investor is to keep his average losses down and gains high with an eye on the markets' moves. In the long run, stocks provide a good place to invest, despite the wild swings in the markets.
click here for more
Paying attention to general market ups and downs produces better opportunities for the average investor and eliminates the risks of panicking when the stocks take a downward direction. Technical analyses of markets show that markets, in general, move in trends. Primary market trends are bull markets and bear markets. Secondary market trends are rallies and corrections.
When the buying of stocks outnumber their selling consistently, the market during that period of time is called a bull market. Also, investors or analysts who are optimistic on the markets' performances are said to be bullish. An analyst may be bullish on one sector like the oil stocks and not so on technology stocks or he may be bullish on the general direction of all markets. A rise in the markets over a short time like a few days is called a bull market rally.
A bear market happens when the general markets show a sizeable drop over a long period of time; that is more than a few months. This may mean the investor confidence is broken and the selling is much more than the buying of stocks. After the Great Depression, a bear market lasted for two years, resulting in high unemployment.
Analysts and investors who become pessimistic and think that the markets indicate a falling trend are said to be bearish. A sudden drop in the markets over a short term is called a bear market rally.
Bear market rallies come about abruptly and may cause panic among the investors. If the panic and pessimism continues, this may lead to recession, which means a significant decline in the economic activity of an entire nation. This behavior of the investors may cause a general market crash, like the one in 1929 that led to the Great Depression with an international outcome. The 1929 Market Crash came about when the bull market that started in 1920 came to an end.
The international crash or the panic selling in 1987, called the Black Monday Crash, however, did not happen because of recession. Although no one is sure why it happened, it started after the falling of the US dollar and trade deficits.
A correction is quite different than a crash, because it takes place after a bull run and lasts for a short time. The drop is more than 10%, but less than 25%. The correction in the markets is an opportunity for the savvy investor to buy stocks at a lower price. On the other hand, thinking that a bear market is only a correction can lead to disappointment.
When a market trend stays over a longer period of time measurable in years, it is said to be secular. Secular bear markets take the prices of the stocks to even lower levels than when the bull markets started.
No reliable method exists to forecast the market trends before they happen. Analysts and economists draw fancy charts and try to connect the trends to one reason or another such as the value of dollar, world events, or politics; however, none of the predictors has been consistently correct.
The best way for an investor is to keep his average losses down and gains high with an eye on the markets' moves. In the long run, stocks provide a good place to invest, despite the wild swings in the markets.
click here for more
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