More Stock Market Theories To Consider

The next theories to be considered include the companies themselves that have their stocks in the market as well as the environment. Here’s how these two theories affect your investment:

In an earlier post, we explained how the stock market does not function in isolation. It is driven by a number of theories that come in different ways and lead to a number of varying results.

The first theory considered is that investors are not rational and cannot always be predicted and the other is the theory of demand and supply that causes prices to increase or decrease based on the demand for the stock and its price.

The next theories to be considered include the companies themselves that have their stocks in the market as well as the environment. Here’s how these two theories affect your investment:

The Company

This theory focuses on the company. It is of the opinion that in order to make accurate decisions about a stock in the stock market, you must carry out ample research into the company itself.

Rather than assess the demand and supply of the stock in the market as well as the reaction of other investors to it, it says you should research about the company. If the company seems to have good potential, then invest.

If it doesn’t, steer clear. The idea is that no matter how favourable the industry is and so on, if the company isn’t fundamentally strong, then the stock will not be good.

If a company’s potentials are great, it can only be undervalued for a period. Soon enough, the price will go up as more people start to see the potential that exists with it.

The Environment

Another key theory is the one that puts forward the environment in broad terms as a key factor to be considered in the stock market. As opposed to carrying out an assessment into the details of a company and its fundamentals, this theory demands that you focus on the environment.

The term “environment” is used loosely here to cover a number of areas. For one, it involves assessing the political climate. If you’re investing in a country that is going through political unrest, it is only natural that the stocks in that market will be affected.

It also means the economic climate. For example, the 2008 depression crashed most stocks in the stock market regardless of how fundamentally strong each of those stocks was before the economic issues arose.

It also covers the industry the stock is in, the new trends in the industry, the new competitors in the space, international affiliation, and so much more.

It is, however, important to note that looking at one area or holding on to one theory in isolation will leave you blindsided. Having an understanding of all of them and keeping watch will keep you one step above the chaos. This is the best theory to live by.

Written by Lawretta Egba.