Changes in stock prices always surpassBarry Copeland 26 / April / 21 Visitors: 19
Changes in stock prices always surpass changes in economy because stock prices are not determined by how a company is doing at the moment but by the prospects of its development. However big the company profits currently are and despite the fact it is paying out high dividends, stock prices can drop if stunted growth in profits is to be expected in the near future. The market is future-oriented; this notion is the key to understanding tendencies for index changes and what market fluctuation is. Stocks increase in value if the company profits are on the rise and reckoned to be going forward. However, as soon as something seems to prevent it any time in the future or we notice first signs of inflation, the market reacts momentarily - stock prices decrease immediately at a rapid pace. When there is a reason to believe things are going to improve, the market acts correspondingly.
To give it a definition, market fluctuation is the growth or decline in value in a short amount of time; the intensity depends on market conditions. Historically, economic events have always been closely related to market fluctuations and had a great impact on the activity in the real sector. When you analyze the correlation between prices and economic performance, you should consider their tendency to change and not its absolute value. For example, unemployment level of 6% does not assist in evaluating the market condition. But if this level drops every month and other data confirms the economic growth, the stock market will go down in anticipation of the rates of bank interest increase. Market analysts study how various characteristics behave in different conditions, which is essential to knowing the level and rate of inflation.
Statistics on economic progress are published several times a week; every figure is announced at a designated time and market fluctuations depend on it. For example, at the end of every month the US Department of Labor share consumer price index for the previous month; they also share the amount of unemployment related benefits every Thursday an hour before the market opens. The market reacts to the news very quickly even though the opinions on the inflation perspectives often contradict each other. In fact, economic analysts make predictions long before the latest reports come out so the market reaction responds to whether the predictions and reality match or not. According to the recent study by Warwick Business School, search engines also affect market fluctuations. The researchers claim that the number of people looking up politics/economy related data and news correlates to the market dynamics. If you analyze these search inquiries, you can actually predict their actions. The results of the study confirm the theory that an increased number of searches implies that stocks are going to lose value.
The market is sensitive to seasonal changes at the same time of year, month or week when prices move up or down. This happens due to varying number of traders or the self-fulfilling nature of technical analysis. Most of the times, the situation improves in January when many investors receive fresh capital; the value usually drops in the summer as major traders go on holiday and sell risky assets. The end of financial quarter may cause higher volatility and even force some prices to change directions; some investors sometimes sell their funds at the end of the tax year to claim less capital on their tax records. Stock prices often peak before long weekends or holidays; as for days of the week, prices can be at their lowest on Mondays because recent news pile up during weekends; Fridays proved to have the opposite effect.
Given the fact that prices are prone to fluctuations, any sensible trader should be interested in profiting from those. There are two options which can help you in doing so: timing and price method. Timing method implies aiming to foresee market fluctuations in order to buy or refrain from selling stocks if there is supposed to be appreciation; and alternatively, to sell or refrain from buying stocks in case of expected depreciation. The price method involves using market fluctuations to profit by buying stocks at the time when their price is set considerably lower than their true value and selling them when share prices exceed it. There is a less pretentious way of applying this method – a fairly simple analysis to determine if you pay too much for a stock. It may even be enough for a passive investor who is planning to own certain shares for a long time. Either way, it is a bare minimum for executing transactions properly.
A trader and an investor should have different attitudes toward economic report publications. When a trader dealing with hourly and monthly price changes comes across these reports, they should forecast short-term consequences. They should also estimate how much time is left before another report comes out because an emerging upward or downward trend is likely to remain steady. Shortly before next statistical information is available they should set stop-losses closer to the current stock price to be on the safe side. On the other hand, an investor should examine the overall picture formed by lots of current reports, analyze potential changes of different parameters, compare the market behavior to economic data and only then make decisions.