Guide to the Stock Market


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Stock Market Performance Data

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In my everyday perusal of the stock market I sometimes come across a stock whose current market value appears low and I of course wonder, "What is wrong with this stock?" A little research sometimes shows an obvious reason, but often it does not. A little more research and I can determine how secure this stock is as an investment, and if all looks good I make a purchase. Some of my best gains have come in this way.

The Problem:

The problem, if there is a problem, with investing in this manner is that it is often difficult to find these "bargains". With thousands of stock to choose from I don't have time to go through them all. So, question: How to make a quick determination on any given day as to what stocks may be undervalued? A method I have found to be quite useful is to compare the stock to the others in it's index.

A Solution:

The theory is that if ABC company makes widgets and the index comprised of all the widget making companies is doing well (i.e. people are buying widgets), then ABC should also be reaping the rewards. Low and behold after months of tracking this type of data it appears this theory is sound.

My best, unsubstantiated, guess for this behavior is due to what I would call "lag" time in the market. What appears to be happening is if ABCs clones or ABC itself hasn't yet noticed or reported the improvement, or, and this does happen, the market hasn't noticed that it has, you get lag.

The Result:

This lag period can last from days to a month, but when the market finally figures it out, and it almost always does (assuming I have done my research and can find no other factors keeping it down) my investment quickly pays off. My best analogy of this behavior is the old adage I learned in science class "Nature abhors a vacuum".

Uses:

- A very useful artifact of this calculation is that the short-term correction is often quite predictable. If an index is doing well but a given stock in the index is down say 5% for the past week, I can usually expect a 5 to 6% gain to be upcoming.

- It also is useful to determine a relative low in the price of a stock. Lets say I have been following ABC for some time and I believe it prudent to invest in some of its shares. I want to buy when the price is low, but when does this occur. No one can tell you exactly, but when it starts to appear as undervalued in it's own index you can be fairly certain it's not going to stay down much longer.

This strategy is of course highly speculative (notice the number of time I said 'often' or 'usually' in this article) and in no way replaces the necessary research (i.e. infrastructure, financial standing, industry, the market as a whole, various trends currently affecting the market, etc.). Performing this calculation does not render a "Pick". However, as a tool, to narrow down the universe that comprises the stock market into a short, manageable list, it is quite useful.

Conclusion:

Assuming this approach interests you then you may ask, how does an individual investor accomplish this task? Most investors already have a sector or index they follow closely and thus know how it has been performing. It is fairly simple to determine the overall trend of an index (try http://biz.yahoo.com/ic to follow indexes) and then see how each individual stock is performing. I have found it even more helpful, and much faster, to break down the individual indexes and stocks by different time ranges (ex. Index over the past 6 months and the stock over the past week) and then list these stocks on a day-by-day basis. With this daily list I can quickly pick out the potential "bargains" and get to work deciding which will be the most productive buy.

Stock Market Performance Data

When analyzing a stocks value, or more to the point change in price (to most investors, the most important number), there are two simple factors which come into consideration: the change in Points and the change in Percentage. Most reviews, ratings, recommendations, i.e. musings on the stock market, that I have see are singularly concerned with Percent, an easy to comprehend and very useful factor. However, viewing the market in this manner is intrinsically limiting in the stocks which can be considered. Including a measurement of change by Points provides a full, more diverse, view of the market, often overlooked by many investors.

For example: If you buy a stock at $50 and sell at $55 you have made a Percent gain of 10% and a Point gain of $5/share. The important concept/difference in using these two metrics is that one (Percent) is based on the dollars you have put in and the other (Points) is related to the number of shares. Fairly obvious, but the interesting devil is in the details.

If I am buying stocks in the conventional method of buying low and selling high as shown in the example the return is obvious. However, what happens if I were trying to take advantage of the change in price in the other direction ($55 to $50 or selling short)? Once again, based on Points, I made $5/share, BUT, by Percent I only made 9.1%.

Also, if I change my example a little and say the stock only increases in value to $51 when I sell I have only made 2% on my investment. For someone who only invested $4,000 to start the return is a disappointing $80 ($60 after you pay for the trade). This will keep me in latt's for the next week or so, but it is barley enough to make the risk worthwhile. However, if I were able to buy 5000 shares, well, I can get quite a lot at Starbucks for $5k.

Investing with the concept of Points as opposed to Percent is therefore useful if you have large amounts of money to put into a stock and/or if you are looking for profit in a declining market. These concepts define two types of investors: those mainly concerned with % change (I don't want to speak for you, but this is me); with reasonably small amounts of money they wish to profit from; and those concerned with Points, with big money making big investments (at least to me).

The major point which I want emphasize is that although the concept of investing by points is not as useful directly to smaller investors, it does help them to get their ?head around? what the larger investors, who are often times in control of a given stocks price, are doing. Thus, it is a very useful tidbit of information to keep close at hand while watching a stock and trying to figure out what it is going to do next.

Conclusion: If you have smaller amounts of money to invest you will almost surely be looking for Percent gains. However, those with larger amounts, trading based on Points can become quite fruitful and allows the investor to take better advantage of the different changes which occur in the market.

Finally, If you are watching the market in bulk and defining stocks only by Percent change, you usually only see those stocks with smaller values changing by any significant amount. To include the higher priced stocks, and become acquainted with their volatility, you need to look at the changes from the perspective of Points. What becomes very interesting is the fertile ground of prices where these two often intersect (somewhere around the $50 range). Here the prudent investor, with this convergence of knowledge backing them up, can make decent gains.

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Stock Market Performance Data, by Alan Goosedanger

Alan Goosedanger has sinced written about articles on various topics from Finances, Stock. Stock Calculations (http://www.StockCalculations.com) is a complete macro research package. We'll do the. Alan Goosedanger's top article generates over 2900 views. Bookmark Alan Goosedanger to your Favourites.

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