Statistics in Stock Market


~ Sabyasachi Rathore




The world of the stock market is full of ups and downs. These ups and downs are coined as a boom and slump in the market by professionals. The overall degree of profit or loss that investors make is directly connected to whether the market is bullish or bearish. Despite the unpredictable nature of the market, it is possible to make an assumption whether the share prices will rise or fall. One of the ways to predict is insider trading which is illegal in India. Ruling this out, we have a legitimate way of achieving this via statistics. The simplest way an investor can use statistics to make profit is by checking the history of the shares he/she wants to invest in. For instance, if the price of a share has been decreasing for a while and the company is planning to launch a new product then buying shares of that company will prove to be profitable. 


There are different approaches on how your profits can be guaranteed. A common strategy used by players in the market is “Price to book ratio” which helps determine whether a company is overvalued or undervalued. It is a simple yet effective approach and can be used by individuals who are newbies to the stock market. A price to book ratio can be easily calculated by dividing the multiple of total shares and price of each share by the book value of the company. The lower the price to book ratio of a company, the more undervalued it is. Negative book value of a company means that the investors are confident that the company is no longer expected to grow in the future.  


A slightly more advanced way to invest is to use “The Price to Sales Ratio”. It shows the value of each dollar the stock market places on the value of the company’s revenue. It can be calculated by dividing the total market capitalization by the year’s sale. A low price to sales ratio means the company is undervalued whereas a high ratio represents overvalued stocks. Future PSR’s can be predicted using the projected sales for upcoming years. 


Price to Earnings Growth Ratio is a rather advanced approach to the market. One can find the intrinsic value of any stock using this method. Intrinsic value refers to the true value of a stock. Unlike the others, the lower this ratio the better are the chances of a positive financial future of the stock.   

Be it a novice or a big shot player in the stock market, applying statistics surely decreases the chances of making a bad move. Not only can you predict the outcomes of the market but can also make a fortune if you play your cards right! 

 


Reference- https://www.alphagamma.eu/finance/3-ways-use-statistics-invest-stocks/

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