This article not only sheds some light on the basic mechanism by which the stock market works, but also offers a step-wise decorum of analysis, forecasting, and predictions.
Any company or corporation, which has been incorporated and listed under bodies such as U.S. Securities and Exchange Board and associated stock exchanges, is a publicly traded company. In reality, when they first came into being, they were called the joint-stock companies. Thus, in order to understand the stock market functioning, knowledge about such corporations is essential.
Stock, Shares, and Joint Stock Companies
The genesis of these companies lies in the industrial revolution, when the capital of sole trading concerns and partnerships started falling short of the expansion expenses and the increasing production demands. The drastically changing society in such a case welcomed the joint-stock companies act, which was passed by the British Parliament and was subsequently introduced in several of the Commonwealth colonies. This concept became popular and today, almost all nations have their own joint stock company acts and business organizations.
The basic mechanism is that the company capital is raised by an Initial Public Offering (IPO). The company issues ‘shares’ for very small denominations such as USD 10-USD 100. This price becomes the ‘face value’ of these shares which form the common stock, known as the actual capital. The shares are freely tradeable in any stock markets where the company is registered through the stock exchanges. A share is a security investment, and parameters such as bonds and debentures having similar working are also included in the connotation of ‘stock’.
After the IPO, when the shares have entered the stock market, the general laws of economics- the law of demand and supply, decide their market value. Investors and stock brokers capitalize on the market value of the stock and shares. It goes without saying that stock prices are dynamic and tend to change every day. The key to make money through this market is to buy at a low price and sell at a high price. So how can one predict or forecast what the price of shares is going to be?
Methodology
There are several ways by which the stock market behavior can be faintly chalked out. Learning about it is a 24/7 process and you need to keep yourself updated about all the facts as of current date. The more facts you know, the better you can interpret this market.
- Getting to know the simple laws and economic concepts is of crucial importance, because the stock markets and stock prices are chiefly governed by common demand and supply forces. The thumb rule is- more the demand, more is the stock price and vice versa. The supply level of the stocks remain constant as the number of shares are usually same. In case of an IPO, the prices that immediately follow the offering (which is a supply), are also influenced by similar laws. For example, the prices of stocks of popular and well-known companies tend to shoot up as many people demand the freshly issued shares.
- Now, we begin with the hardcore financial analysis of stocks. The first criteria of comparison is the company stock. The performance of the company within the field or sector in which it operates is of crucial importance. The better the company’s sales, performance, and reputation, the better is the stock price going to be. Such stocks also tend to have a very high dividend.
- Some financial fundamentals such as the prior market price of the share, the financial behavior of the company, and the balance sheet analysis are also great pointers as to how the stock is doing or may perform in the future.
- Next comes the management style which is a crucial factor, and the share market price is significantly affected by it.
- The next criteria of comparison is the current affairs. Every event in the world tends to affect the share value of companies, especially of those that are party to the event. For example, war or epidemics tend to affect the sales, and ultimately the share prices of crude oil and Pharma companies respectively. Government legislation tend to affect the sales of companies, thereby bringing down or pushing up their share values. Similarly, festivals, rumors, and holidays also affect the stock prices significantly. Annual cyclical changes tend to affect the company’s share market prices. For example, post the budgets by the governments, share prices often tend to go up in most cases. Similarly, the stock prices of food companies increase in harvest seasons, or the stock prices of crude oil companies shoot up in winters due to the high demand for oil products.
On the whole, inquisitively keeping a track of the share prices and all the current ongoing events is of absolute importance. An economic newspaper and a stock exchange website can provide the best possible information for research.
Disclaimer: This article is for reference purposes only and does not directly recommend any specific investment choices.