Why is the Stock Market So Difficult to Predict?
The actual price of a stock is determined by market activity. When making the decision to buy or sell, the shareholder will frequently compare a stock’s actual price to its fair value. For example, if the stock is trading at 20 per share and its fair value is 25, it may be worth buying. On the Contrary, if it trades at 20 but its fair value is 15, the stock would be considered overvalued and the trader would be wise to avoid it. Stock’s fair value would be based on some standardized formula. However, there are many ways to derive this term.
One method is to merge the value of a company’s assets on its balance sheet, minus downgrading and liabilities. Another is to determine its intrinsic value, which is the net present value of a company’s future earnings. Because the methods yield a slightly different result, it’s sometimes difficult to know if a stock is overvalued, undervalued, or fairly valued. And even if it is overvalued, that doesn’t mean investors will suddenly sell and the price will fall. Actually, a stock can remain overvalued for moderate some time. This is also why it can be problematic to make buy/sell decisions based on where the price of the stock is in relation to some moving average.
Knowing which occurrence will cause a trend reversal is corresponding to seeing around the curve of a strong buy or sell of a stock.