Common-Sense Methods to Forecasting Stock Market Prices

If someone were able to predict stock market prices with complete accuracy, this person would make an absolute fortune along with any person who uses those prediction methods. Unfortunately, no such person or method exists. The stock market is difficult to understand and is influenced by thousands of factors that cause prices to fluctuate and become volatile. There are many software programs that analyze these variables to help predict prices, but there are also some simple, common-sense methods that can be used to make an educated estimate of the stock prices in terms of your investment.
Analyzing Micro-Economic Indicators

Essentially, microeconomics is the actual performance and structure of sectors or firms in the economy. This means that you will begin developing your forecasting method by choosing the stocks that you want to purchase and forecast. You will start your analysis by using information that is provided by the firm to investors along with market research reports that are available from brokerage firms or banks.
Compiling Micro-Economic Indicators

The next step in your analysis is to compile the simple microeconomic indicators that are important for your stock. You should keep an eye out for changes in management or any other signs of long-term instability. You should also track the movement of corporate profits and follow future investment plans. Most importantly, you should research the firm thoroughly to find information on investment plans and products as well as new initiatives. These factors will give you the information you need to forecast changes in future stock prices. Generally, firms with stable and consistent management as well as new initiatives and products will cause an improvement in the performance of the firm and an increase in stock prices.
Ratio of Price and Earnings

Next, you need to calculate the price/earnings ratio. This ratio is the amount of money that investors will pay per share in terms of the amount of earnings for each share. Normally, most investors will pay between $10 and $15 for $1 in earnings for each share per year. If this ratio is greater than 15, there is probably reason to believe that the stock is overpriced and is heading for a fall. Reported earnings are generally mailed to investors in the quarterly figures reports.
Macro-Economic Indicators

You should also put macroeconomic indicators into your model. Microeconomic analysis can increase the effectiveness of your model but it is still not enough. Firms that have great management can also suffer from factors that are outside of their control. The most important macroeconomic indicators that you should take into account are rate hikes, tax increases, fuel cost increases and poor media coverage – this is not exactly an economic factor but it can create economic consequences.
Create Your Model

Finally, you can create a model to help forecast stock prices by using the information you gathered about microeconomic and macroeconomic indicators. In markets with more stability, like Western Europe and North America, the microeconomic factors will influence stock prices the most. However, factors like tax increases can significantly change the profits of a firm and must be considered in your model. Although there is no model that is perfect, this simple model can give you a reasonable idea of the direction of future stock prices.