How to Understand the Stock Market Nowadays
These days, the stock market investors make many mistakes. Then they try to find out what happened to some classical ideas of investing in the stock market and why old-time approaches do not work. Is stock market the same or it changed? How the age of worldwide economical integration, new technologies, and global problems affect the stock market investing? No doubt, in the last decade stock investing changed. Among the major changes are:
- Globalization (strong economical dependencies, accessible global stock exchanges).
- Technologies (instant delivering news, fast-triggered automated trading systems).
- Investors' psychology (high sensitivity to news, more irrational behavior).
The stock market of the last decade characterized by faster stocks' price movements, lesser predictability, and stronger dependencies on global factors. Due to the Internet, the news becomes much stronger factor too. Under influence of news, modern investors are prone to give up a rational behavior and follow temporal emotions. Specific information can drive the market easily through investors' fast feedback. The mentioned above three new-age changes have up-trend character. The stock market has a mixed trend-cyclical character. Let's assume that the new-age recent trend will continue and semi-cyclical character of the market will be in force. Therefore, mostly traders, not long-term investors, may play the stock market in the future.
As we know, a stock's price movement is a result of supply and demand. There are several factors that traditionally have an effect on the supply-demand balance, and consequently, form a stock's price. These are: company's fundamentals, industry-market conditions, global and national economies, different types of news, analysts' and experts' opinions, technical analysis signals, seasonal and cyclical fluctuations, the investors' psychology, etc. Evidently, the key to successful investing is the ability to predict these and other factors.
Typically, the stock market prediction can be built on the following approaches: Efficient Market Hypothesis (it states that the prices capture all known information), Fundamental analysis (it considers companies performance and macro-economical conditions), or Technical analysis (it uses historical prices and volumes statistics to detect trend). What approach is the best? Can the combination of different methods improve the accuracy of prediction? In fact, different investors use different approaches and insist that they are right. It seems the different groups of investors have good earnings in the different periods (not all the time).
It is possible that some factors become more dominant time-from-time and drive the market. If we knew the factors that are most influential at each moment, we could apply forecasting methods that are the most appropriate. To this end, the science knows at least two techniques that can be handy: proof from hypothesis and back testing. Both can be employed either by own research or by using the software tools that available. These tools should be powerful enough to perform back-testing simulations for composite hypothesis.
In conclusion, a modern stock market is different than it was ten-twenty years ago, when a strategy "buy-and-hold" was good enough. Now it is much harder to have a decent investment return without a proper research and analysis. Today, the direction of the overall market influences significantly an individual stock, many classical approaches fail, the stock market changes its character, and emotional factors become more powerful. At present, winning in the stock market is based mostly on right information and right tools.