Why can’t we predict the stock market?

Why the stock market is so difficult to predict?

To be specific, the stock market is a very wide game of probabilities. You remember the lessons on probability, right? In school, almost all of us studied about rolling a die, tossing a coin. Did we find any exact way to predict what would be turning out next? No, right? Similarly, the stock market is a game of chances. You cannot predict what would be what. But you can learn more about it and invest smartly.

Randomness

It is hard to predict the market because of the very simple reason- randomness. The market depends upon too many variables. It is not one or two factors that are to be considered when it comes to foreseeing the market. So, naturally, we cannot decide what will the behavior of it with the available details.

Using your instincts

Share market is a very large platform of assumptions. You might take a look at the profile of a company and guess its future. The guess can be either right or wrong. Because it is a sort of analysis that you are making. But remember the fact that you can always take guidance before investing.

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Start Small

If you are a beginner, always start small. Make mistakes. Learn from them and grow. There are ample mentors, video references available if you want to improve. Even if initially your predictions fail, do not give up. And for you to not give up, start small. Small losses are always better than bigger ones. Learn more about profits and losses.

Accept profit and loss with gratitude

The stock market shows mercy to no one. It shows partiality to no one. Every trade is fair and equal. So, instead of being a sore loser, learn that why did your prediction make you lose this deal. Always be open to profit and loss equally

Porter’s 5 force model

Let us study a simple example of the factors that affect the business. This shall help to know that why predicting the share market is hard.

- The threat of new potential entrants

- The threat of substitute product/services

- Bargaining power of suppliers

- Bargaining power of buyers

- Rivalry among current competitors

- The threat of new potential entrants

Potential competitors belong to the firms which are not currently racing in the business but have the potential to do so if given a choice. The entrance of the latest members strengthens the industry. The threat of new competitors in an industry can drive current members to maintain costs down and give more to engage customers. New competitors bring new dimensions and pressure on prices and costs The warning of entry, therefore, puts a cap on the profit potential of an industry.

The threat of substitute product/services

This threat depends on the extent of a range of obstacles to entry, including economies of scale, to the cast of building brand awareness, to registering to distribution channels, to government constraints. The threat of entry also depends on the capacities of the possible potential participants. These circumstances affect the profitability of the future potential of the firms.

When a new product or service fits the same basic requirement differently, industry profitability status is hugely influenced. The threat of a replacement product is high if it offers an attractive price-performance trade-off relative to the industry’s current products or if switching costs are low.

Bargaining power of suppliers

Suppliers point to the firms that produce inputs to the industry. The trade potential of the suppliers guides the potential of the suppliers to increase the prices of inputs(labor, raw materials, services, etc) or the costs of the industry in other ways.

Companies in each industry buy multiple inputs from various suppliers, which account for various proportions of costs for them.

Bargaining power of buyers

Buyers indicate to the customers who finally consume the product or the firms that distribute the industry’s product to the final consumers. The bargaining power of buyers refer to the potential of buyers to bargain down the prices

Powerful customers can use the power to take prices down or charge more service-affecting costs, thus captivating more charge for themselves but assuming business profitability and future potential.

Buyer power is most leading when buyers are at great in number and the competitors serving those products are alike.

Rivalry among current competitors

If rivalry is great, it turns down prices or reduces profits by increasing the cost by various factors like altered product lines, increased advertisement budget, etc. Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to profitability.

It depends on several factors like Fixed costs incurred by the industry, competitive structure, customer target group for each industry, and demand conditions of the industry.

Three GOLDEN rules-

Instead of trying to predict the market, you can happily focus on three rules.

1. What do you buy?

Always know your shares well. Is the quality of business that the company does good? Analyze it and never forget to know more about how the company is going ahead. Assessment of their balance sheet, competitive nature is always important in business. Only such sound companies make a profit.

2. How much did you buy?

If you buy too many, it increases the risk. If you buy too little, it won’t help you get any meaningful profit. The right amount is to be calculated before you buy.

3. At what price did you buy?

Returns should be inversely proportional to the investment you make. Small investment and huge returns should be something to seek for.

There is no remedy to prevent a “bad market”. So, why not focus on these golden rules? Always focus on these aspects while investing. Refer to the market trend. Try to understand how it is moving and invest smartly.

So you cannot predict the possibilities of the market, right? But you can consider ways to improve your investment skills.

So, concluding, one can say that predicting the stock market is not easy because it does not depend on one factor. It depends on various factors. And we cannot define how all of them combined would affect the overall performance.

There are many ways that you can learn stock market trading. If you want to know more about anything specific let us know in the comments section so that we can help you out.

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