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Many different methods are used to calculate the value of stocks, and many factors affect the price. Making a profit on investing in stocks, in fact, depends on finding stocks that are underpriced with respect to their intrinsic value.
Profitability affects stock value. When companies release their quarterly earnings reports, their revenue and profitability as seen in those reports normally have an immediate effect on market value, something that often leads managers paid bonuses in the form of stock or stock options to focus on short term profitability. Two other major factors in determining the market value of a stock are price/earnings ratio and earnings per share. Perceived potential for growth also affects stock price.
An investment manager in my family told me the following
Divide companies into industries and when funds are available to invest, buy the company,
which has the highest yield, (dividend divided by price).
which has the lowest price to earnings ratio, (earnings divided by price).
The next time funds are available, pick another industry and repeat the process. Spread the investments over many industries.
Some investors compare growth. They plot the graph of earnings on semi-log graph paper. When funds are available to invest, the buy the stock with the highest growth rate.
Some investors buy loaded laggards, which are companies, which have a price per share lower than their book value (assets per share).
Some investors buy small companies, like Apple, Home Depot, Texas Instruments, and Google. Of course now these companies are big, but not too long ago they were small. People who invested in them made a lot of money.
One strategy is too sell half after the price doubles and invest in another small company.
People who invest in small companies should expect to make money on very few investment. Only one in a hundred will make money. The others will make stock certificates that make good wallpaper.
Some people who invest in loaded laggards also invest in wall paper.
Some people trade daily by ploting a stock's price and volume. They use "technical analysis." There is this book, which is said to be the granddaddy of all technical analysis books. John Magee wrote Technical Analysis of the Stock Market back in the 1950's or maybe early 60's.
I know that Ravi, my mother's boyfriend, had a well worn copy, but Ravi taught me to read by having me read the Daily Racing Form, so that might give you an idea about technical analysis.
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