Topics Covered in this article
Stock price predictions have tremendous influence and importance in stock market tradings, and it is one of the most challenging tasks due to the high volatility of stock market data. Share market investment is often risky, hence creating an accurate forecasting model to minimize this risk. This article aims to present stock prices, trends, and forecasting of its future costs. An efficient market hypothesis states that it is impossible to predict stock prices and that its behavior is random. The stock market forecast is a real challenge because of the difficulty involved. Indeed, the stock market share price depends on several parameters (emotional, financial, etc.).
Calculating future stock prices is an essential aspect of stock trading and finance. It provides the base for further investments and market actions. Apart from trading studies, it is ideally studied in computer science, statistics and corporate governance. Usually, professional traders use fundamental and technical tools to analyze the market stock predictions, trends, and pricing to rely on for future investment decisions; it motivates the investors to buy and sell stocks at the profitable position. Professional traders typically use fundamental and technical analysis to analyze stocks and make investment decisions. Fundamental analysis is the traditional approach involving a study of company fundamentals such as revenues and expenses, market position, annual growth rates, and so on. Technical analysis, on the other hand, is solely based on the study of historical price fluctuations.
Stock Market Index
An indicator of the trend in the movement of securities prices dealt with on a stock market on a specific day is called a ‘stock market index’. A stock market index’s function is to provide a benchmark or price trend for the investment community. It captures the behavior of the overall equity market. It is defined as a statistical indicator representing the securities constitution’s value. Indices often serve as barometers for a given market or industry and benchmarks against which financial or economic performance is measured. It is an independent, full-service index provider, supplying accurate, reliable and transparent index data.
Indices underlie various financial products in today’s marketplace such as exchange-traded funds, futures and options contracts, mutual funds, variable annuity and equity-indexed annuities, and structured products such as OTC options, swaps, warrants, equity-linked notes and public/private debt. It maintains a transparent and systematic methodology that is fully integrated across all indices of an index family. This methodology, together with historical data, is open for review and is made available at no cost to the professional investment community.
Importance of Stock Market Index
Stock market indices are significant in the following respects;
- Leading indicator traditionally, indices have been used as information sources. By looking at an index, it is possible to know how the market performs; its representation through figures in infinite applications of stock market indices in economic research helps is investments. It is high-priced when an index reflects on highly up-to-date information, and the portfolio of an investor contains illiquid securities.
- Application advantage in recent years, indices have come to the fore owing to direct finance applications in index funds and index derivatives. Index funds are funds that passively ‘invest in the index’. Index derivatives allow people to cheaply alter their risk exposure to an index (called hedging), and to implement forecasts about index movement (called speculations). Hedging using index derivatives has become a central part of risk management in the modern economy. It has now become a multi-trillion dollar industry worldwide, being critically linked up to market indices.
- Benchmarks stock market indices serve as a benchmark for measuring the performance of fund managers. An all-equity fund should obtain returns like the overall stock market index. A well-specified relationship between an investor and a fund manager should explicitly define the benchmark against the fund manager
A trend refers to the overall direction of a market or a stock or asset price in the capital market; it is designated through trendlines reflecting the security market price. One of the stock market’s primary duties is to price the stocks for profit earning and sharing. This price movement facilitates liquidity in the market and supports the economic building. There are two types uptrend and downtrend; it defines the price action by highlighting the swings in prices when the price makes higher swing highs and higher swing lows for an uptrend, or lower swing lows and lower swing highs for a downtrend. Stock market traders and investors usually opt to trade in the direction of the trend. Uptrends and downtrends occur in all markets representing the market performances of the securities.
What Factors Make The Prices Go Up?
In stock market language, the concept of stock prices going up refers to an uptrend; as deliberated under stock trading, it represents the hike of price in the stock market. An uptrend represents the price movement of a financial asset when the overall direction is upward. Each successive patterns of the price action movement are higher than those found earlier in the uptrend trend. The uptrend is therefore composed of higher swing lows and higher swing highs. Some factors are associated with this uptrend movement of the stock;
The three different market trading sessions are pre-market, stock market, and after-hour trading; these trading sessions act as the stock market’s primary trading hours. Concerning the price fluctuations, each session has a significant influence on it. The after-hour trading session will comparatively cause the stock prices to go up; this session occurs after the market closes. An investor can buy and sell securities outside of regular trading hours. It has a significant effect causing prices to go up.
The after-hours market will generally have less liquidity, more volatility, and lower volume than the stock market, it typically has a positive impact on pricing. For example, if a stock price was lower at the regular hour market session’s closing, the same stock price has high chances of increasing during the after-hour session. Though the market will not maintain the same price in the following day regular market session, the price hike caused during the previous day after-hour would be highly profitable.
Concerning the influence of the momentum factor in stock price rise, it is uncertain and highly dependent on other factors; yet it has a considerable impact. Momentum refers to an impetus gained by the stock price movement in the market. When it happens, investors rely on the assumption that the price will not fall. This increases investor confidence and provides a hike in buying and selling those stock, which directly influences the stock price. While analyzing this factor, another concept called channel support stock also comes into play; it refers to the level at which an asset’s price might stop falling. For example, if an investor invests in stock and that particular stock attains the channel support motion, then the investors assume that the stock price does not fall, which maintains the momentum of the stock price going up.
High Demand and Low Supply
The usual macroeconomic theory of supply and demand law can also be applied to market stock pricing. Concerning the factors contributing for stocks’ price to go up, under the theory of demand and supply, the decrease in the supply of goods and services while the demand remains the same or demand gets higher, then the prices of stock tend to rise to a higher equilibrium price. The factor of higher demand may be contributed by various aspects such as;
- Good profiling of the listed company stocks and management
- Steadiness in the trading cycles
- High-profit returns
- Good dividend policy of the company
Value of Business
Business value is measured using the intrinsic value assets and the turnover they make out of market business activities. The increase of stock prices in the market has a different proportionality; if the business’s value increases without an increase in the shares, the business’s value grows in the market, directly influencing the rise in stock price.
Increasing Shareholders Value
Shareholder value is the worth of a business’s financial owners received for owning shares in the company. An increase in shareholder value is created when a company earns more returns higher than the capital invested; to be well-defined, the shareholder value is created for shareholders of that business benefited from profits. Increasing shareholder value by creating a positive profile about the corporation among the investors in the stock market facilitates the stock price to go up.
- Increase unit price
- Sell more units
- Increase fixed cost utilization.
- The decrease in unit cost
Factors Influencing Stock Prices
Share process- factors
Very many factors influence the price of securities that are traded on the stock exchange. It is interesting to note that the movement in share prices is considered a broad indicator of a company’s state of affairs. It is highly characteristic that a combination of many factors causes changes in the price levels of securities. The price prevailing in a stock exchange will also affect the yield or return on a security or the general expectation about the industry’s return on shares. Following are the factors influencing the prices of security in a stock market.
Demand and supply
A natural force that affects the price level of security is the interplay of its demand and supply. Under the conditions of a perfect market, supply and demand details interact to determine security price. Accordingly, where the supply of security is abundant and slimming demand, its price goes down and vice versa. The demand and supply position of industrial securities depends on various factors such as the yield and the general expectation about the outcome, etc.
The price of a security is greatly affected by the easiness with which funds are made available in the money market by banks and financial institutions to investors and brokers to undertake buying and selling securities. The availability and cost are influenced by the interest rate, determined by the bank rate charged by the country’s central monetary authority, viz, the RBI. Accordingly, where the bank rate is lower, the demand for funds will increase, causing a spurt in the securities market and vice versa.
The activities of players in a stock exchange such as underwriters, share brokers, bank and financial institutions are responsible for causing fluctuations in share prices, especially new companies. Through the large scale buying of securities, the market intermediaries may attempt to create artificial scarcity for some companies’ securities and thereby jack up the share prices. Similarly, the actions of institutional investors also stimulate the demand for securities.
The extent of the price level prevailing for a particular security is determined by a company’s ability to pay dividends to its shareholders. The dividend-paying ability is dependent upon the financial capacities of the company. Accordingly, a company with profitable investment opportunities with excellent cash flows will be better positioned to pay dividends periodically, which determines higher or lower share prices. It is interesting to note that the dividends act as a signalling device for share price movements.
Profile of management
The top management profile has a lot to do with how a company’s policies are formulated and implemented. Similarly, any change brought about by the company’s management board will affect its quality, soundness, and financial stability. Such changes may lead to positive or negative reactions in the investor community; this, in turn, will cause the price determination to occur individually.
The ups and downs in the economy called ‘trade cycles’ are also responsible for causing price movements in a particular fashion. Accordingly, in times of prosperity where there is a high consumer and industrial activism, the market looks up. This shores up heightened activity on the stock exchange leading to higher market prices. The investors will take part in stock market activities in a large number and with a lot of enthusiasm. The converse happens in times of depression, with share prices plummeting.
The activities of speculators such as the bulls and bears cause upward and downward movement in share prices. They cause fluctuations in security prices. For instance, bull speculators who buy in the expectation of a profit from the upward trend of prices cause the price to move upward naturally. Similarly, the bear speculators’ actions will lead to selling pressure, with share prices coming down. On the other hand, when bulls liquidate their holdings, they lower the stock exchange costs. Similarly, large- scale buying by bears to meet their short sales will force the security prices upwards. Thus, speculative pressures engineer price volatility.
The changes and political leaders’ policies at the helm of a county’s affairs vastly determine a security price. The stock exchange will act as a barometer that reflects the changes taking place in the political arena. Accordingly, positive change will cause a spur in share prices, and political disturbances will cause prices to tumble. Political consideration plays a much more significant role in price movement than any other factor; politics are chiefly responsible for policy formulation and implementation in the economy, governing industrial development.
In addition to the abovementioned factors, the following factors are also responsible for causing price variations:
- The personal health of the head of a government
- Weather conditions affecting agricultural production and consequent demand for essential goods
- Industrial relations
- Competitive market conditions
- Corporate activism such as mergers and amalgamations
- Conditions of the balance of payments
- The general price levels
- General market sentiment
The price fluctuations often influence by various factors and have been discussed in this article. Market players ensure a smooth ride in share prices as they take an informal view of the trends of expenses and anticipate future trends based on price fluctuations. However, the harmful consequences of the stock prices going up and down make it an imminent necessity to increase investor education about the stock trend. It is indispensable for the proper and efficient stock exchange. It assumes significance in the context of the need for continuity, liquidity and smoothness of working of the stock exchange.
Therefore, the stock prices’ beneficial consequences must be reaped through genuine and healthy market practices and curbing unhealthy gambling. Proper and adequate regulatory measures must be put in place.