Do I Really Need to Analyze Stocks Before Buying and Selling?

The financial markets synonymously called as stock markets have been fragile due to various direct and indirect catalysts. To identify these market influences, the separate discipline under the broad economics has been developed which is called investment management. There are three development stages, the first, speculative phase before 1929, the second, during the 1930s the phase of professionalism, and the third, the scientific phase after the Markowitz's study in 1952.

All these stages had focused on the formulation of the reliable valuation models for the assets valuation which is ultimately the valuation of an individual stock or the price of the individual stocks. If we are going to buy shares from the market, it is wise to have some ideas on what is the value of those shares? If we are paying certain rupees for a stock, we have to be confident that we are paying the right amount. The stock market is the most practical area of the study in the entire discipline which gives us the immediate quantifying results i.e. either loss or gain of money.

There are so many views in the academics and in the practices trying to find out what are the major factors to affect the stock prices? Initially, the quantifying variables are considered the most important variables to influences the stock prices such as the book-to-price ratio, earnings-to-price or price to earnings ratio, size of the company or the number of shares outstanding, cash flows effects, etc. but the only or the well-accepted justifications have not been found!

Further, some studies are focusing on the behavioral aspects like investors' characteristics and behavioral issues, and market behavior itself, the news effects, the media effects, the political effects, etc. For instance, some popular studies are conducted on human psychology and the behavioral issues, the overconfidence in the judgment, and so on believing the investor behavior is the major aspect for stock price movements.  But, there are no conclusive results.

With all these efforts, the general understanding by the investment communities in the world is that the events that burst out expectedly or unexpectedly have a significant impact on investors' mindset so that such information plays the crucial role in individual investment decisions making the process, in totality on the overall investment performances. In sum, the recent focus has been shifted towards the intangibles rather than only in the fundamental effects on the stock prices. In the simple terms, there are hidden factors in the market which are beyond the listed companies' financial reports and the numbers published on the reports. What could be those hidden or the unseen factors affecting the stock prices moving up and down every day? This is a very important question to ask ….!

We have dozens of graduate and undergraduate business programs teaching thousands of students in the area of business, finance, and accounting nationwide and some of us have an international degree. But, the local financial market literature is almost empty! The organized efforts to contribute to the only stock market of the nation are required. Our stock market transfers the ownership of billions of rupees worth of assets from one hand to the others every single business day! To fill up such gaps we deserve the need for extensive studies on various aspects of the market to justify or to explore the opportunities in the financial market in Nepal.

Being critical on the needs of the systematic contribution to the overall development of the stock market, we would like to share some insights derived from a study conducted in the area of practical finance. The study shows there are three important factors that influence our investors' decision-making process. In other words, stock investors look for various factors before they step into their brokers' office to place their buying and selling orders. Those factors are broadly classified into three parts. Firstly, our investors consult with brokers and friends and browse the media coverages of the stocks they wanted to buy or sell. Secondly, they look at the dividend payment records, and the average prices of the stocks they want to buy and sell, and finally, Nepalese investors also look at debt and equity structure of the company, the management, and the trend of the stock prices in the market. Please note that every study is based on certain assumptions and this study is also based on some assumptions.

Bottom-line:

In the conclusion, we believe that the longtime investors in the stock market have their tested skills to analyze the available information required to make their buying and selling decisions but still, they might have some imperfections and influences from various sources. After reading the concluded three broad factors, we believe that newcomers and the amateurs in the stock investors would have some ideas on the need to look at the various important factors before placing their buying and selling orders at their brokers' offices or their online platforms.

  Sudarshan Kadariya 

  M.Phil (Finance) TU Gold Medalist 2012