Business, Legal & Accounting Glossary
Stock prices move in trends. Once a trend starts, it may last for weeks, months, or even years. An investor who buys a stock at the beginning of a new uptrend and holds it through the advance stands to reap a substantial profit. The earlier an investor can identify the start of a new uptrend and buy the stock, the greater the profit potential. There are no sure ways to predict what a stock price will do next, but several reliable indicators can alert an investor to a stock that is likely to make a strong move in the near future.
The stocks of companies that grow earnings faster than the market tend to appreciate the most, but the link between earnings growth and stock price is not always straightforward or linear. Companies report earnings quarterly, but stocks advance only when investors notice them and start buying. Sometimes a company reports robust earnings but investors seem oblivious. This may be because of general market conditions or because investors are skeptical about the earnings; whatever the reason, earnings growth is a good indicator of a stock’s upward potential.
Technical analysis uses a stock’s daily and weekly price action and trading volume to anticipate future moves. Charts have predictive value because investor action in the market is influenced by human emotions such as fear and greed, and since human nature does not change and investors react similarly to similar circumstances, chart patterns recur in different stocks even when the market participants change. When a chartist recognizes a pattern in a stock chart, he can use past data to project what the stock is likely to do next.
When a company releases news after market close, investors may respond strongly by entering buy or sell orders overnight to be executed at the market open the following morning. The prevalence of buy or sell orders bodes well or ill for a stock’s opening price. Investors who are good at interpreting stock news can often predict with varying degrees of certainty what a stock will do in reaction to the news when it opens for trading the next day.
Investors can respond to the news released outside regular trading hours by trading a stock after-hours or pre-market. This trading is limited in scope but generally indicates where a stock is likely to open during regular trading hours.
Stock market predictions are plentiful but often miss the mark. It is dangerous to act on a prediction or in anticipation of a stock’s price move, because a stock may not move as expected or may move in the opposite direction. It is safer to wait for an actual move before taking action.
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This glossary post was last updated: 5th August, 2021 | 0 Views.