What makes stocks go up and down? How to predict if a stock will go up or down
What makes stocks go up and down?
Supply and demand
Supply of a commodity and the demand consumers place on the commodity in question significantly affect price movement in the market. As such, market trends will go towards a point of equilibrium. That is a point where the supply and demand of the commodity are equal.
This also applies to stocks. When many traders want to buy a certain stock, there’s high demand. This causes the price to rise. Alternatively, when sellers outweigh buyers, there’s great supply which causes the price of shares to fall.
Market indicators are quantitative tools that interpret index data of a stock allowing traders to predict future market moves. Traders who use technical analysis are more likely to use indicators since they use a wide array of formulas and ratios.
Some of the most common indicators include:
· Market Breadth
This tool compares movement of several stocks that have a similar price movement. This enables traders to predict price movement as a whole. For example, they can use the Advance-Decline Line to compare stock that reach new highs against declining stocks.
Market breadth are beneficial to traders that use trends to make investment decisions. Especially if the trends used are accurate. What ’s more, market breadth incorporates price movements and a company’s market capitalization providing a precise trend movement.
· Market Sentiment
Market sentiment will compare volume of stocks traded against the price of the asset. This allows traders to determine whether the market is bullish or bearish. Most traders will use the Put-Call Ratio approach to compare put options with call options, gauging the overall market mood.
· Moving Averages
Moving averages silence the noise that is the stock market. It uses specific data points to curve out a linear price movement of a specific security over a certain period. For example, traders can use either the 50, 100, or 200 moving averages. Short-term trend followers can use a week-long moving average. Keep in mind moving averages show historic price movements. As such, they don’t predict a stock’s price movement.
· On-Balance Volume (OBV)
OBV shows the volume of stocks traded. Like moving averages, it does not predict price movement of an asset. Instead, it confirms an existing trend. If you encounter a rising OBV, then the price of the asset is rising. A negative OBV shows a decline in an asset’s price.
Should the price and OBV of an asset go in opposite directions, it means the price is about to change. For example, a rising price accompanied by a negative OBV shows the price will fall.
This is another popular market breadth indicator. It uses highs and lows to curve out a smooth price movement. Like other indicators, it enables traders to assess the overall movement of the market. Other market indicators include advance-decline issues and new highs-new lows.
Global news events can also cause the price of stocks to rise or fall. Events such as terrorism, natural disasters, or political events are common determinants of price movements. For example, after the 9/11 incident, fear and uncertainty gripped the market causing prices of many stocks to fall.
If a country announces to offer military aid to a foreign country, stock prices of weapon manufacturers and military contracts are likely to rise as well as demand for the stocks. Here, you need to gauge which news can cause long-term change in price movement. Most news events only cause a short-term change in movement.
Company’s financial reports
Healthy financial reports can significantly cause the prices of stocks to rise. Besides, if the media speculates positive financial reports of a specific company, their stock prices are likely to rise. Hype about a company can also cause price movement.
If there’s growing interest on a startup, the stock prices of the startup in question will eventually rise. Sometimes, hype from media and international blogs can do little compared to hype from respected investors. For example, should Peter Lynch or Warren Buffet publicize a company, more than 90% of investors are likely to buy to their hype.
Examples of price movements
Will Tesla stocks go up? Why?
The EV giant, Tesla, has over the last decade beat expectations in the production of electric cars. Recently, Elon Mask, Tesla’s Chief Executive, sold billions worth of stock amounting to 10% ownership stake. As of writing, he has sold at least $6.9 billion worth of Tesla stocks. This saw the value of the company’s stock drop by 21% in early November.
Despite the drop, it still outshines other automakers in its value. In fact, the third-quarter financial results beat experts estimate while earnings from stocks shot by 145%. Sales also increased by 57% reaching the $13.76 billion estimate. Besides, it passed the 232, 000 estimate, delivering 241,300 in the same quarter.
The company also aims to produce up to 20 million vehicles per year, which is double what other giant automakers produce. And over the past decade, the company has undergone massive expansion in Asia and Europe. It is however expected to face competition from Nio, Ford Motor, BMW, and others.
Tesla stock has an IBD Composite rating of 99, a Relative Strength Rating of 97, and an Accumulation/Distribution Rating of A-. While these indicators show a healthy stock, it’s price is yet to go up. This is due to Elon Musk selling his shares disrupting the stability of the stock. As of writing, it is yet to steady itself.
Will Apple stocks go up or down? Why?
Apple, a leading tech giant, has seen its market capitalization soar after announcing its interest in the EV industry. According to a Bloomberg report, Apple is accelerating its EV production and is set to launch by 2025. This announcement saw its stock price increase by 2.85%. and according to CompaniesMarketCap, Apple’s $2.641 trillion market capitalization has surpassed Microsoft’s $2.551 trillion.
Over the last five years, company’s stock have risen by 400%. While it has seen a dip in its price, the current $161.02 share price is higher than the $157.26 52-week average. Early Last year, its share price dropped to $56.56 but was able to double to $133.88 by September 2020.
The company’s sales figures are also healthy reporting a 28.8% increase in the third quarter. While the figures reached $83.4 billion, it did not meet the $85 billion Wall Street estimate. Net earnings rose from $12.67 billion to $20.55 billion, registering a 62.19% increase. And earnings per share was at $1.24, which was the Dow Jones estimate.
The company also released the iPhone 13 series, iPads, and the Apple Watch Series 7 in 2021. All these advancement are more likely to cause its stock to go up. The price is estimated to rise to $205.48 by end November, according to Wallet Investor. With the EV production announcement and favorable reception of the iPhone, the stock will be a “buy” over the next few years.
How to predict if a stock will go up or down
So how can you tell if a stock will rise or fall? Well, here are two simple methods to predict price movement. Let’s look at each.
Stock’s intrinsic value evaluation
Some of the avid investors such as Warren Buffet mainly use this skill. Their estimates or evaluations are usually accurate. For others, it is a matter of guess work. to calculate a stock’s intrinsic value you can use either of the following approaches.
· Financial metric analysis
· Asset-based valuation
· Analysis of discounted cash flow
This approach allows you to identify stocks trading well below their intrinsic value. However, the value is subjective and differs between traders. That said, you need to invest in stocks trading less than below their value.
Forecasting a stock’s future EPS and PE
This beginner friendly approach allows you to guess whether a stock price will rise or fall. You need the stock in question historical price data, which should span three years. You’ll also need EPS Q over the same period. You should sum the last four quarters. After this, calculate the P/E of the last three years. Divided the Price by the value of the last 4 EPS.
What makes stocks go up and down? Final Verdict
As you can see, many factors make stocks go up and down. Regardless of the factor, they boil down to fundamental and technical factors. Luckily, many indicators can help you assess which direction a stock price will follow.