Exchanges as an institution for making transactions appeared in the XII-XV centuries. The main function of the exchange was the free determination of the price of an asset. Initially, bills and government loans were traded on exchanges. The list of instruments that were traded was gradually expanded. However, the main function of determining the fair price of an asset remained unchanged.
The exchange provides conditions and rules for conducting trades so that participants can execute trades and the transactions themselves. A modern exchange is largely a virtual space in which trades are conducted from anywhere in the world, and brokerage companies provide tools for working on the exchange, as well as technical and information services to increase the efficiency of trading parties.
How does the stock price change?
A share receives its first estimate of its value when a joint-stock company is established. The invested capital is divided into shares, which have their par, that is, the originally assigned value. The joint-stock company can then conduct an initial public offering by selling part of the shares on the free market to finance its activities. At this stage, the function of the exchange as an instrument for determining a fair price is fully manifested. Bidders determine the prospects of the business and set the purchase price in accordance with their beliefs. Most often, it is higher than par, but there may be cases when an IPO evaluates shares below par. After that, the shares are on the market and can change their value in the real-time.
What changes the stock price?
There are enough participants in the market who may have a wide variety of views on the fair value of shares. Someone believes that the business will develop successfully, someone does not believe in success. Accordingly, optimists monitor the price of a share and place buy orders when they believe the company’s future results will bring a substantial return on investment. Pessimists, on the other hand, wait for the stock price to be high enough to sell off the optimists’ expectations, as they do not believe in future success. The balance of interest in buying and selling changes every second, so the price chart does not stand in one place. Sometimes there is news that can change the view of market participants, then the share price can change dramatically. It also happens that the price gradually moves in one direction over a long period. This movement is called a trend.
How to determine when to purchase or sell a stock?
In general, there are two main approaches to determining the time and price of buying or selling a security. The most popular method nowadays is technical analysis. With the help of technical analysis, traders study the chart of price changes. For intraday trading, charts with one-minute, five-minute and fifteen-minute intervals can be used. To determine a longer-term trend, daily, weekly and even monthly charts are already used. The main postulate of technical analysis is that the study of the history of the chart allows you to identify patterns and, based on them, predict the future price movement.
Double tops and bottoms, head and shoulders, flags, gold and death crosses are all the names of events that are reflected in the price chart. There are many different technical analysis techniques used by traders. Naturally, there is no one universal tool for all occasions. However, it should be noted that older charts, i.e. daily and weekly, are more true for identifying big trends. In addition, the more complex the technical analysis system, the higher the probability of interpretation errors. We also note that technical analysis itself also becomes a factor influencing the price of an asset. If many bidders believe in certain patterns, then they automatically begin to implement them.
Fundamental analysis is more academic. In this case, traders study macroeconomic statistics, financial statements, and alternative investment opportunities. If the result of such a study indicates an underestimation of the stock, then a decision is made to buy. If doubts begin to appear about the ability of the business to show the predicted result, then a decision is made to sell the asset. That is, if technical analysis is based on the price change graph, the fundamental one is more based on studying the indicators of the company itself, and then – comparing the expected result with the current stock market valuation.
Which is more effective – fundamental or technical analysis?
Disputes about this are ongoing. Those who love active trading tend to stick to technical analysis to a greater extent. Those who are prone to calm trading and rare trades use fundamental analysis more. However, we can say that the greatest efficiency comes when a systematic approach is applied to assess the market situation. Technical analysis suggests something, fundamental analysis tells something, and in total, we have a clearer idea of what price is considered fair at the current moment. The use of various techniques in the system increases the reliability of the forecast.
By the way, if you evaluate your decision from the position of a bull or a buyer, and then just as accurately conduct an analysis from the position of a bear or a seller, you can significantly reduce the probability of error. Therefore, you should not limit yourself in the set of working tools, but rather use all the possibilities, for which your own brokerage account will say a big thank you in the form of a steady increase.