Stock Market Predictions: The Art of Valuation

As investors we are constantly picking up the daily newspaper and observing what stocks are being traded at what value and how our own stocks are doing in the market. Making stock market predictions or valuing stocks is not an easy task to accomplish and it is definitely not easy to maintain high trading prices.  Directors or Managers of any stock trading corporation always try to keep their stock prices high as it gives the shareholders a sense of calm that their investments are safe in a reliable corporation. Now, what really determines the value of a stock price?

For a lot of people it is what the company does, what it doesn’t do or how it does it but in the stock exchange, the value of the stock is determined by the profit it gives out to its shareholders and how its performance is going to be in the future. Directors never like making dividend cuts because it always takes a  negative effect on the stock price. Hence, even in a good year, directors are likely to set pay-out ratios that they know they can achieve even for future years. This is because of the second factor effecting stock prices; projected future performance. A cut in future dividends signals to the market that the stock value is going to fall because the company is expecting not to perform well.

Stock Market Predictions:  Key Factors To Look For

There are some very important values or calculations you should look for in any company’s financial statements that will help you evaluate whether the company is trading at the right price. The first is the Earnings per share ratio, which is how much did the company earn according to every share it holds in the market.  The second is price to earnings ratio, which is how much did the shareholder earn per share according to the current market price of the shares. Finally the forecasted price earnings ratio which is what the company predicts will be the earnings for the company compared to the future predicted market price of the stock.

Stock Market Predictions: The Valuation

Now as said before stock market predictions are not easy to make, in fact it is nearly impossible to be precise how high or how low the value will fall. The most we can do is point the direction that it will go towards. Now the key terms discussed help any investor recognize if the company is a safe play or not. A company with high price earnings ratio is said to be very profitable for investors, however the PE ratio is based on current performance and market valuations depend on future incomes, hence this is where FPE comes in. FPE is based upon how much the company is expected to grow in the future. It won’t be precise but it will be close, from this prediction the market values the stock according to the demand it would have in the predicted price.

Stock Market Predictions: Having Different Stocks

Earnings are key factors in determining the success and returns for an investor in a company. What if the company doesn’t want to give out high returns and instead grows very steadily and sometimes even outperforms companies with higher dividends. How do you evaluate such companies? These companies are called Value Stock companies, where investors are more interested in seeing their wealth grow than getting high dividends. Then there are growth stocks that constantly grow their dividend payouts by growing their revenue and profits.

In conclusion stock market predictions completely depend on the company’s current performance and how they signal its future performance will be. That’s why companies hate leaking out sensitive information about their projected performance as it immediately affects the stock price.