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How to Measure the Top of Stock Price? Comments

Amy Tailor   |   March 10, 2008
How can we tell when the stock price has reached its highest point? Is there a way to figure out the stock's maximum possible growth? If the stock has increased by 100 percent in a single year, is there any perspective for further growth? Some investors avoid investing if the stock shows an aggressively positive performance. The logic behind it is that the stock price can hit its highest point at any minute and quickly start retrieving south. On the other hand, investors might lose a great chance to make good returns on an unexpected growth.

For example, in a five-year period, Akamai Technologies has increased by 2136 percent, Potash has increased by 1592 percent, Monsanto - by 1293 percent, Dick's Sporting Goods - by 385percent and Daktronics - by 114 percent. Of course, those who invested in these companies five years ago have got away with some wealth by now. I am wondering what is the reason behind such a magnificent growth of these stocks. This can be explained with some business fundamentals.

For example, Daktronics has averaged about 22 percent annual revenue growth over the past five years. Demand for Daktronics� large-scale display and audio systems for sports venues, as well as advertising applications has enabled the company keep the good times rolling for investors.

Dick�s Sporting Goods has shown a solid track record in a competitive retail space for sporting goods. The company's revenues have been growing at a 24 percent rate in the last five years. Its gross margins have grown from 24.7 percent in 2002 to 29.8 percent over the last 12 months.

The history does not always repeat itself, but it can tell a lot about the company overall.

One of the most significant influential factors is a company�s earnings performance. It measures a company�s profitability. A company normally reports its earnings four times a year, or every fiscal quarter. Of course, the ability to evaluate an individual company's earnings performance is essential to most investment methodologies, but perhaps even more essential is the ability to compare it with the rest of the market.

Furthermore, your attention should always be directed to the level of a share demand. The level of demand usually depends on large institutional investors and funds such as banks, mutual funds, pension funds, etc. They buy and sell stocks in large blocks driving the prices up or down depending on the degree of buying or selling. Consequently, identifying stocks with heavy institutional buying activity is a crucial element in locating stocks poised for big price moves.

A price increase also depends on innovations, new strategies, products, improved management, etc. By far, most innovations cause a price increase. Thus, if the stock performs quite well, and the new product is yet to be introduced but has been already rumored of, the price will see the growth. It will reach the top after a press release. �Buy on rumors, sell on news� is a golden rule for wise investors.

Thus, if you don�t want to lose your money, you should be extremely attentive. Listen to rumors, watch press releases, determine the company�s earnings and market performance, spy on large players and finally keep your eyes open! Further, you should sometimes follow your intuition. The stock market is certainly a mysterious phenomenon, but if you are intelligent enough, you can make a great fortune!
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