Financial Adviser: 5 Important Indicators Every Investor Needs to Know to Win in the Stock Market
ILLUSTRATOR Roland Mae Tanglao
If you want to make big money in the stock market, you need to be on the right side of every move.
Sometimes, by simply going with the market flow, you can increase your chances of making profitable investments.
So before you start investing your money in stocks, it's important that you have a solid foundation on which you can build your strategies.
If you were asked this question: “what makes a stock price go up or down?,” what would your answer be?
You may say that a stock price will go up because it has better earnings outlook. Or some may say a stock price will go down because the market thinks it is expensive.
There are many answers to this question but in essence, a stock price goes up because the demand is greater than the supply and when there is more supply than demand at a specific price level, the stock can fall.
But what are factors that affect the supply and demand for a stock? What are the things that we need to know to anticipate changes in stock prices?
Here are the five basic indicators you must know to understand stock price movements:
Stock prices are a reflection of market emotions as determined by demand and supply.
The daily price that you see in the chart is what we call the bar chart, which shows important information about what happened to the stock during the day.
A single bar chart can show the open, high, low and closing price of a stock.
If the closing price is also the highest for the day, it means that the buyers are in control of the stock, which may mean further increase in the share price.
If the stock closed at the lowest price of the day, it means that the sellers dominated the trade, which may signify further weakness in the stock.
If the stock closed the day at the same price it opened after registering high and low prices, it means that the forces of buyers and sellers of the stock are in deadlock.
You can also check the volatility of a stock by looking at the size of the bar chart. The longer the vertical bar as represented by the difference between the high and low price, the more volatile the stock is.
A stock price rises, and falls based on market expectations of growth.
How much do you expect earnings of the stock to grow this year?
Try to review the latest financial report of the company. Evaluate the recent pronouncements by management about planned expansions.
To put your expectations in place, you can assess the earnings power of the company by looking at its earnings track record.
For example, the net earnings of Sta Lucia Land (PSE: SLI) has been growing by an average of 39 percent per year from P31 million in 2008 to P817 million in 2017.
Knowing the historical growth rate, you can expect that the future growth should be near the 30 percent range.
In 2018, SLI reported that its net earnings grew by 30 percent to Php1.1 billion.
This year, SLI also reported that its first quarter earnings increased by 27 percent to P338 million from P265 million in the same period last year.
When you know the expected earnings growth and where the potential sources of growth are coming from, you can form your own reasonable estimate on where the stock price will probably go.
A company that pays dividends regularly indicates that it can generate a steady stream of earnings.
In a rising stock market where earnings are expected to increase, investors also anticipate that dividend payments may also go up, resulting in an increase in the share price.
You should not expect a high dividend yield if you are buying a growth stock because most of its earnings are spent on expansion rather than on dividends.
The dividend that a stock provides relative to its share price is called the dividend yield. As the share price goes up, the dividend yield falls, making the stock less attractive.
Mature companies with steady businesses are the ones that declare large dividends for shareholders.
For example, the average historical dividend yield of Manila Electric Company (PSE: MER) is 5.6 percent. This year, at the current price of Php286 per share, the dividend yield of the stock is 4.2 percent.
If your objective is just to earn dividends, you can also consider investing in preferred shares where the dividend yield is relatively higher than common shares at around six to eight percent, but with limited capital appreciation.
4. Relative Strength
If you want to know how a stock is doing compared to another stock or group of stocks to and know how to evaluate its performance, you can do a relative strength analysis.
For example, if the price of SM Prime (PSE: SMPH) is P38.25 and the price of Ayala Land (PSE: ALI) is P52.20, the relative strength of Ford SMPH to ALI is 0.73.
This number will not mean so much without doing a historical trend.
Let’s say we see that the relative strength of SMPH to ALI has been declining from 0.87 in April to only 0.73 today, this means that SMPH is doing worse than ALI.
Falling relative strength does not necessarily mean SMPH is on a downward trend. It just means that, currently, the market is paying more attention to ALI.
Sooner or later, the relative strength of SMPH to ALI should catch up with its historical average of 0.80, which can either result to the stock of SMPH catching up with ALI or a correction in ALI’s share price.
Knowing the relative strength as an indicator can be an important tool in identifying stocks that are trending in the right direction and at the right time.
Trading volume is an important indicator if you want to assess the strength of a stock price movement.
Remember that the price of a stock is a result of supply and demand. By simply looking at the buying and selling volume of the stock, you can assess if the stock price will likely sustain its trend given the direction of demand or supply.
You can also use trading volume to validate a stock’s trend. For example, if the stock price closed the day on a higher price but at lower volume compared yesterday, it may mean the trend may be weak as there may not be enough demand to sustain it.
The same also can be said if the stock price ended the day lower but the trading volume is also lower. It may mean that the fall may be temporary as there is not much selling volume.
If, on other hand, a stock price closed higher on higher volume, then a possible follow-up may happen the next day due to strong demand.
The same also applies to a falling stock. If selling volume is rising, it indicates that the stock price may fall further.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice [email protected] or follow him on Twitter @henryong888