educatief

7 evident truths that matter when investing on the stock market

1. Successful stock trading is achieved when you manage to systematically buy low and sell high

Succeeding on the stock market by systematically buying low and selling high may indeed be a truism but it can only be applied if the value of the stock is known at all times. The value of a stock results from the intrinsic ability of a company to realize profits in the future (the Future Profit Potential).

2. Price constantly swings around the value of the stock

The price of a stock is constantly moving around its value. Price regularly increases above the value of the stock only then to decline below the value of the stock. Sometimes the price is way above the value of the stock and then it declines to unrealistic lows. The price will ultimately move in the direction of the current fundamental value of the stock. In the long term the price simply follows the value of the stock.

3. Prices move in waves

Stock market price courses are a succession of rising and declining movements. After a rise, prices decline and then rise again. Stock market price is a constant succession of waves. If you employ a certain amount of good will you can see a pattern in the length of the waves.

4. The stock market over exaggerates in both directions

The stock market usually rises way too high and falls way too low. Stock prices are a result of fundamental and psychological factors.  Price rises always cause optimism in the investor world. Everyone affected starts to see the fundamental factors that determine the value of a stock through rose-colored glasses. The positive factors are inflated while the negative factors are ignored. The longer the rise lasts the more positive the reports become; favorable economic figures are expected as well as a continuing market rise. Investors start to become afraid that they might miss the market rise. This kind market mood can result in a buying panic. Everyone wants to own shares whatever the cost, yet as the price rises investors loose their grasp of economic reality. Prices continue to rise to unsubstantiated levels.
 
When a price declines the exact opposite occurs. Price declines always cause a certain amount of pessimism. People start to ask questions about the value of the stock. This time, however, there is an air of negativity and the very worst case scenarios are contemplated. People ask themselves what the stock could be worth if the negative predictions come true. This leads to fear of what is to come and more stocks are put up for sale, which in turn leads to an accelerated price drop.  Sometimes panic arises whereby investors completely loose touch with reality. Prices decline to unsubstantiated lows. Some investors recognize that the prices are too low but they sell anyway in the hope that they will be able to buy the stocks back at an even lower price later on.

5. The stock market price increase potential increases as a stock lists further below its value.

Obviously if the current fundamental value of a stock has not changed, the price increase potential of that stock on the stock market increases as the price declines below its value. When prices decline “the herd” gets more and more uneasy and at some point a panic sets in. The number of fearful investors wanting to get rid of their stocks at any price increases as the stock price continues to decline. Prices often tank without the current fundamental value of the stock being considerably affected. Investors who follow the current fundamental value of a stock buy at the lowest price. Clearly though, you should only buy once you are sure that there is in fact nothing wrong with the company. If you are unsure then you should wait patiently until things become clearer. You should never be in a rush to buy; there are always new buying opportunities for investors who know the current fundamental value of stocks.

6. Buying during a declining trend increases risk

The biggest risk is buying overvalued stocks during a declining trend. As long as the trend is still going up the investors just fan the flames as they each continue to buy even when the stocks are fundamentally overvalued.  There is a mad rush for the stocks because everyone is afraid to miss the upward trend. At a certain point the increasing price trend stops because investors who know the current fundamental value of the stocks begin to sell. When the trend turns it is all over.  The fire is put out and the overvalued stocks turn downward. Clearly the biggest risk with a declining trend is overvalued stocks.

As described above, there is often panic during a declining price trend and stocks are offered for sale on the stock market no matter how low the price. Each successive decline causes more unrest and provokes yet another decline. The decline doesn’t even stop once a stock is listed far under its value. You can never tell how low the price will fall. It is better to just stand on the sidelines until the decline stops. After the dust has settled there are usually plenty of chances to jump in at a low price.

Things usually calm down again once the price stops declining. Investors are no longer putting stocks up for sale at any price they can get and more and more investors begin to realize that the stocks are listed far too low. The price then automatically rises towards the current fundamental value of the stock again.

7. The greatest profit can be made by buying undervalued stocks just as a declining price trend has turned into a rising price trend

Once an upward price trend has started there is often no stopping it.  At that point everyone wants to buy again and the price often increases to way above the current fundamental value of the stock. There is a regular dip in price during a rising trend but the overall driving upward forces usually stay strong until the price has risen above the value of the stock. Therefore, the best chances of making a profit are after a decline when the price is listed way below the value of the stock and the price trend is starting to rise again.