Sunday, December 4, 2011

Predicting Factors That Can Affect Stock Prices

If investors want a stock and are willing to pay more, the price will go up. If investors are selling a stock and there are not many buyers, the price will go down. The stock market can often be demystified by the basic economic principle of supply and demand. Economists generally calculate the economic health of several sectors to determine whether the markets will go up or down.

When there is a fall of jobless claims and higher labor productivity many economists begin to speculate that a recession is slowly recovering. As more investors show optimism in a recovery there becomes an increase in the demand of stocks. This is because they believe the value of the stock price will increase in the future. If the jobless claims fall lower and lower the public feels more confident spending and investors begin to have faith in the markets which drives them higher. The fact is, stocks don't have a "fair value", and they never have.

A lot of the buying and selling is driven by supply and demand. So not only do economic factors play a role in the rise or fall of a stock price but they are also driven by psychological forces (fear of lost opportunity, good news, bad news). The market goes up and down dependent on what the public or investors think about the variety of economic factors and that can create demand or a lack of demand for stocks.

When purchasing stocks in a volatile market such as today, timing is key. Here are some basic principles to look at when deciding whether or not to purchase some shares of stock in a company.

Look at the macro environment or the overall economic market and begin to decide what direction you think it will be going.

Try to find different sectors or industries poised for future growth.

Find companies within those sectors that are growing, and you believe in their product or service and would buy their products. It can also help a lot if you can find a company in a growing sector that has a strong sustainable competitive advantage.

Many other factors should be observed when deciding to purchase a share of stock. Make sure to do you research and understand how markets function before jumping into the stock market. Many times there is often elements that can affect the price of a share of stock which cannot be foreseen. A good idea is to paper trade some of your stock theories before investing any real money. This way you can begin to understand some of the different factors that drive prices up and down as the days pass by.