Thursday, October 22, 2009

How to Predict Stock Prices

By : Nicholas Swezey

It should be stated first that nobody can predict future prices in an ever-changing market. Anyone who makes a prediction is just guessing, no matter how much information, education, or computing power they may have.

Financial Analysts
You may have seen price targets being set for certain stocks by financial analysts. Their targets are usually based on an extensive amount of research and experience. Can they predict future prices? Of course they can't. They are just making their best guesses. However, a funny thing can happen when one or more respected analysts set price targets on a company - they can create a self-fulfilling prophecy. In other words, if many people believe these price targets to be accurate, they will place their trades accordingly, which can cause the stock price to end up at the target price! Remember, there is not a single, correct price for a company. The current price is based on many factors, such as the predicted profits of the company over the next several years. Nobody can predict future profits, competition, or the economy perfectly.

Penny Stocks
One popular trading topic is penny stocks. You may have seen advertisements for penny stock subscriptions or newsletters. They say things like, "Company XYZ is $0.25 now but we have a target price of $2.75." Are these just scams to rip people off or do these people have magic crystal balls? Many penny stock promoters are just trying to get hundreds of people to start buying a certain stock, which causes the price to go significantly higher. Then the promoters or whoever paid them to do this can sell the shares they purchased before the promotions for a quick, sizeable profit. This is often an illegal activity for the promoters, especially if they use false or misleading information. This has been mentioned here as a word of caution to you. It is common to lose fifty percent or more of your money in less than a week if you participate in one of these promotions.

Insider Trading
One effective way of predicting price movements is to have inside knowledge - company information that has not been released to the public yet. Of course if you use or share this information for the purpose of making a profit with trading, you can go to jail. Remember Martha Stewart? She went to jail for charges related to insider trading. This law was created to help maintain a level playing field for investors.

Company Forecasts
Most publicly traded companies provide quarterly guidance on the sales and profits for the coming quarters. They usually do not give share price forecasts but the numbers they do give can be used to estimate an increase or decrease of the current share price. This can be as simple as calculating the future price using the current P/E ratio (Price per share divided by Earnings per share) with the forecasted earnings (profits).

Predicting prices is a very difficult thing. There are simply too many factors, which cannot be controlled. Simple or complicated prediction methods can be used but often the best method is using your instincts about the company and the economy to determine if the price will go up or down within your time frame.

Nicholas Swezey is the creator of the trading game on his site,


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