Sunday, 26 August 2018

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Why is the Stock Market So Difficult to Predict?

Stock Valuation:

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.

Triggering Event:

Knowing which occurrence will cause a trend reversal is corresponding to seeing around the curve of a strong buy or sell of a stock.
The Decision Process:
This is the most important of the prediction. Inside every individual there is a logical and an emotional constituent. For example, when buying a car, we have to know the engine, fuel efficiency, facilities, or other items. When making investment decisions, since there is an shareholder on the other side ready to buy what trader selling what trader want to buy, shareholder must be able to process the relevant data and make a good decision. However, it’s impossible to know everything shareholder would need to know and process it without any bias.

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