It is very important for stock players to learn about stock price factor analysis. The underlying reason is that the objective of the investment is to increase the portfolio of the capital he has invested.
The factors that can trigger stock price changes are important lessons for stock players. So that he can have a clue when buying or selling shares.
By understanding the various factors that cause changes in stock value, at least investors can draw preliminary conclusions and decide what is best for their investment portfolio.
- 1 Stock price analysis explained
- 2 The goal in stock price analysis
- 3 Why stock price analysis important?
- 4 Stock price determinant factors
- 5 Stock price factor model
- 6 The stock price 3-factor model
- 7 Bottom line
Stock price analysis explained
The definition of stock price analysis is an analysis method used by stock investors which are used as a material for making stock investment decisions. In essence, the method or method of analysis in stocks is almost the same as price analysis in forex. Broadly speaking, it is divided into technical analysis and fundamental analysis.
Technical analysis in stock price factor analysis
Technical analysis in stocks is a method or method that investors use to predict the movement of a stock price by studying historical market data such as price, volume, market psychology, and others.
In stock technical analysis, investors will be dealing directly with a real-time chart of price changes. The analytical method usually used is to read past price history from chart patterns that are naturally formed by dynamic price changes.
Use candlestick to analyze stock price
Candlesticks are a type of chart in technical analysis in the form of candles, in which one candle represents the open, high, low, and close stock prices. Other types of charts are line chart and bar chart, compared to the two, candlesticks are the most preferred chart types because of their ease of reading.
Below is an example image candlestick chart in stocks.
The picture above is an example of a line chart candlestick that is formed from collective price changes consisting of open, high low, and close prices for each candlestick. Easily to analyze the candlestick above has formed a bullish pattern, which means that the stock price tends to increase
The indicator in stock price factor analysis
In stock price analysis, many investors use indicators as a helpful tool when analyzing price changes. There are various kinds of indicators that investors can use, such as the popular moving average indicator. This basic indicator is a tool to determine the trend direction of stock prices.
Other indicators in technical analysis such as Bollinger Bands, MACD, stochastic, and many others. Below is an example appearance of the moving average indicator.
The volume indicator contains the transaction value during the stock trading period. The volume shows the total share transactions between sellers and buyers. Stock investors use volume to predict the direction of stock price movements for the short term because it can reflect the condition of the stock.
The large volume then many transactions are taking place during that period. Conversely, if the value is small, then the stock will not attract investors.
Below is the image volume indicator, which shows at the new window below the candlestick chart in the standing bar.
Fundamental analysis in stock price factor analysis
Fundamental analysis is stock price factor analysis which is very important for a stock investor. This analysis method differs from technical analysis which emphasizes past price history. The fundamental analysis places more emphasis on analyzing data on the performance of companies that are issuers of shares.
Broadly speaking, stock prices are driven by the performance of the company or issuer. Fundamental analysis uses financial reports as a basis for valuing or valuing shares, by looking at three important things:
- Assessing the performance and condition of the company, whether it has a good and sustainable financial performance.
- Determine the reference for the fair stock price which will be the benchmark for making share buying and selling decisions.
- Monitor and evaluate stocks on a regular basis to ensure whether the shares are still worth investing in or not.
Companies that have performed well are seen by many investors as more attractive stocks to buy because they have good future prospects. Meanwhile, the issuer’s poor performance can lead to a decline in share value. Therefore, it is very important for stock investors to always monitor the development of the issuer’s performance.
The goal in stock price analysis
Stock price analysis has the main objective is to obtain profits or capital gains from the shares that have been purchased. Capital gain is the positive difference between the selling price and the purchase price of shares and the cash dividends received from the issuer because the company makes a profit. If the selling price is lower than the purchase price of the shares, the investor will lose or it is called a capital loss.
Apart from having the same goal, investors also have different investments, split into short-term profits and long-term profits.
Short term Investors buy in the morning and immediately sell when the price rises. The increased price more than buying and selling transactions on the same day or in the following days. They call speculators or day traders.
Meanwhile, real investors are those who buy shares for the long term, hold and sold after a few months.
Specifically, the objective of the stock price factor analysis is:
To detect the ups and downs of stock prices
Stock price analysis aims to detect the ups and downs of stock prices, through trend lines, historical price movements, through patterns that occur.
So, when the analysis states that prices tend to rise, traders can take a buy position. Conversely, when technical analysis states that prices are likely to fall, this can help traders take short positions.
Provide buy signals and sell signals
Technical analysis can provide buy signals and sell signals of a stock. The analysis provides buy and sell signals based on indicators, which are usually called oscillators and moving average indicators.
Decide to sell the stock
When an investor finds a condition where the issuer has experienced a decline in the performance of the company’s financial statements, then he will be able to decide that it is best to sell shares because in the future it may experience a decline in value.
Why stock price analysis important?
In investing, an investor aims to get capital gain, therefore it is very important for an investor to do an analysis related to the shares he will buy so that in the future it will give the gain as expected.
In addition to the main objective, studying stock price analysis, it can also add insight to companies that are performing well by observing the company as the object of research.
Because there are thousands of companies listed on the stock exchange, buying shares without knowing how the issuer is performing can be said to be like buying with full speculation. And that is not a wise way, because if an issuer with a bad performance is chosen, the impact will be a loss.
Stock price determinant factors
In general, the stock price determinant factor is caused by the quantity of supply and demand. But behind that reason, there are hidden other reasons that cause demand and supply to increase or decrease.
But there are several factors that affect the ups and downs of a company’s stock price. These factors are classified into internal factors and external factors.
- Internal factors are factors that arise from within the company.
- Meanwhile, external factors are factors originating from outside the company.
Internal factors refer to the causes that are the result of conditions in the company.
Company’s Fundamental Factors
Stocks from companies in good fundamentals allow investors to hunt them down and cause the trend of their stock prices to rise. Meanwhile, stocks from companies with bad fundamentals will cause the trend of their share prices to fall.
Corporate action can be in the form of policies taken by the company’s management. The impact can change things that are fundamental in the company. Examples of corporate actions are acquisitions, mergers, rights issues, or divestments.
Projections of Company Performance in the Future
Projections of the company’s future performance are important data for investors. Among several factors, the most highlighted are the cash dividend rate, the level of the debt ratio, Price to Book Value (PBV), earnings per share (EPS), and the level of profit of a company.
Companies that offer a higher dividend payout ratio (DPR) tend to be favored by investors because they can provide good returns. In practice, the DPR has an impact on share prices. In addition, EPS has also contributed to changes in share prices. High EPS encourages investors to buy these shares which cause the stock price to rise.
External factors are the reason stock prices rise or fall due to conditions outside the company but have an influence on stock prices.
Global Macroeconomic Conditions
This is a global condition but many investors pay attention, for example, to increase or decrease interest rates due to the policy of the Central Bank of America (Federal Reserve). The high inflation rate, high unemployment due to security and political issues.
Government policies can affect share prices even though they are still in the discourse stage and have not yet been realized.
Market Manipulation Factors
Market manipulation is usually carried out by experienced with the large capitalized investors by using the mass media to manipulate certain conditions for their purposes, either lowering or increasing stock prices.
This is often referred to as a rumor. This condition can also be the reason for the price to fall even though the company’s performance report is good.
The Panic Factor
The news may trigger stock investor panic. This panic can cause investors to sell their shares. In the panic selling phenomenon, investors tend to release their stock regardless of the price, because they fear that the price will fall further.
Stock price factor model
Portfolio formation is a strategy to reduce risk or loss in investing. Economists and financiers have documented many anomalies in the field of finance. One very anomaly much researched is the Capital Asset Pricing Model (CAPM).
CAPM was initiated by Sharpe (1964) and Lintner (1965) separately. Where this discovery led William Sharpe to win the Nobel Prize in 1990 with Harry Markowitz. In its application, CAPM is widely used in calculating, among other things, the cost of capital and evaluate portfolio performance.
Unfortunately, many empirical studies show that CAPM cannot explain return (Fama & French, 1995). Miller (1999) argues that it is not enough just one factor. Namely the market beta who is able to explain stock returns. Malkiel. (1999) also stated that there is still much need for empirical research on what factors alone that affects stock returns.
Fama & French (1992) said that market beta is unable to explain returns shares, in contrast to company size and book-to-market equity.
The stock price 3-factor model
The three Factors Pricing Model invented by Fama and French (1993) is an alternative model in estimating returns expectation. Doubts in CAPM in estimating returns expectations bring the Three Factors Pricing Model as a multifactor very influential model.
If in CAPM the behavior of return and risk is determined only by the market, Fama and French add fundamental factors of the company, namely firm size and book to market.
Thus, the three explanatory variables are in Estimated return expectations include market premium, size premium, and book to market premium. Monthly returns are regressed against market premium, size premium, and book to market premium which is formulated in the equation
E (Ri) = Rf + bi [E (Rm) – Rf] + siE (SMB) + h iE (HML) …………. (5)
E (Ri) = expected stock return i
Rf = risk-free rate of assets
E (Rm) = rate of return on the market
SMB = the difference in the value-weighted return of the stock portfolio small and value-weighted return of stock portfolios large cap.
HML = the difference between the value-weighted return of the stock portfolio and the high book to market and value-weighted return low book to a market stock portfolio.
bi, si ,, h i = regression slope
Ri – Rf = α + bi [Rm-Rf] + siE (SMB) + h iE (HML) + ei
Fama and French added the size and book to market factors to complement the role of the market beta coefficient in CAPM
Conducting stock analysis and applying a portfolio model can help diversify capital beyond just one investment product. Choosing shares of small, unknown companies may still have a higher chance of gain than large companies.
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