Stock Prediction Based on Other Stocks Performance
The stock market is a vast financial entity tightly integrated with many other parts of the economy. The players involved in the stock market use many methods for predicting where stock prices may flow. Stock comparisons and sector analysis are often used in stock market predictions. An investor may make decisions on the likely outcome of a particular stock by comparing the performance of other stocks. This technique focuses less on the history of the desired stock and instead on the success and implications of other stocks. There are many ways to view the stock market in this manner.
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Commodities
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The stock market is a system for capitalizing individual corporations. Investors seek profits by buying equity ownership in a company in the form of shares. If the company is successful, the share price rises, increasing the value of the investment. One way to predict corporate success, and thus the success of its stock, is to analyze the company's relationship to a commodity involved with the company's services. Oil service providers are a prime example. These companies build machinery to aid in the detection and drilling of oil. Their value increases if the value of oil increases. Thus you can make predictions about oil servicing companies' stocks by watching the price of oil. The "USO" stock is a good barometer of overall oil prices. If this stock, the U.S. Oil Fund, rises in price, then one can generally assume that the stock of an oil service company will eventually follow.
Competitor Performance
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Most stocks exist as part of a larger sector that contains many other stocks of similar companies. Often, a single company's success will send its competitors' stocks higher as well. For example, during earnings season, individual companies report their quarterly success on a set date. If a company reports solid earnings and also offers an optimistic forecast for its next quarter success, that company's share price is likely to rise. However, other companies that sell similar products or services can also benefit from this news, even though it does not reflect their respective success. A company may not report earnings for another month, but due to the optimistic forecast, investors believe all the companies in the sector are likely to benefit from increased demand for that product group. Thus one stock ends up affecting many other stocks.
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Market Performance
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The stocks that represent market indices can often provide invaluable predictions on the strength of an overall market, and thus the likely influence of any individual stock. Some of the most popular stocks for this kind of analysis are "SPY," "DIA," and "QQQ." These stocks trade using regular shares, but instead of following individual companies, they track entire stock market indexes, including the S&P 500, the Dow Jones Industrial Average, and the Nasdaq 100. If these stocks perform well, they will usually cause an overall market optimism that lifts the majority of all other stocks. However, when one of these stocks performs badly, the market is usually unstable, and any individual stock could lose value for no reason related to its corporate performance.
Sector Analysis
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Each individual sector represented in the stock market provides trade-able stocks that track only that sector's performance. Many seasoned investors and stock traders look at the overall sector before considering any one individual stock. This offers two predictive powers. If the stock of a particular sector, such as the finance sector, represented by ticker "XLF," is doing poorly, then any bank stock should be a cautious investment. You can easily view how sectors compare with each other using a free finance site such as Google Finance. However, if one expects the stock market to reverse from a recent decline and head higher, using sector analysis can often provide the best choice of stocks that will perform well during this time. The most lagging sectors are often those to rise sharply as they are balanced out with other sectors. Thus, the stock that performs the worst with respect to other stocks in a sector that is overall lagging the entire market may rise the most quickly if the market turns around.
Corporate Takeovers
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When a company makes a bid for another company, the amount of this bid represents what the company believes its potential partner is worth. By dividing this amount by the number of outstanding shares, you arrive at the perceived share value of the company to be taken over. This is often at considerable odds to the actual share price at the time of the announcement. Thus the share price is dramatically affected by the takeover company. During negotiations, if the share price of the takeover company changes, its bid or affect on the potential partner company is affected, which in turn affects its share price. A key example of this phenomenon was the Microsoft bid for Yahoo in 2008. Not only did Yahoo's stock price rise substantially, but Microsoft's share price declined as its own investors expressed doubt about the partnership.
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References
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