Most people invest in stocks at some point. Whether they invest into the market directly by opening up their own account or by investing into a retirement account or mutual fund that invest into stocks. Each company that has gone public offer shares to its investors, which can go up and down. Everybody who invest into stocks does it because they expect the price of the stock to go up. But what actually causes a stock to go up and down? That is the Ultimate question.
It supprise some people, but just because a stock does well does not necessarily mean that the price of the stock will go up. Everyone seems to believe that one of the stock market basics is that when a stock goes up it means it has profited and when it goes down it means it lost money.
However this is not necessarily a true statement. There is a real simple reason why the price of a stock goes up, more buyers than sellers. That’s it! If more people want to buy the stock then sell it the price will go up. You can see this in action if you pay close attention to the market, there are times when a company will announce that their profits were up, and yet their stock took a hit. Why? Because investors where simply not happy enough with the amount that their profit was up and start to sell the stock.
This is why using technical analysis can work so well. Technical traders may not give too much weight on what the company is actually doing, but instead look for patterns in the market which tend to occur over and over again.
But this does not mean fundamental analysis doesn’t work. looking at the company’s fundamentals can actually be very profitable in the long term. The reason being, if a stock truly is a great investment then more and more people will be willing to buy it, causing the price to go up. Value investing is really finding stocks that are great investments before everyone else does and starts to buy it.
So, now that you know what causes a stock to go up or down how does it really benefit you? Simple it all depends on your investing plan. If you want to make money in the short term then studying technical analysis is very effective. It can be much more helpful to be able to read chart patterns in the short term then to understand balance sheets.
On the other hand, if you want to just put your money in something that you are confident will go up in the long term then fundamental analysis still works great. Investors do eventually get into strong stocks. By looking for value stocks an investor can get in before the crowd figures out what is going on. Of course it may take years before you see a profit, but if a stock truly is a good investment then chances are it will be pretty profitable in the long term.