Anyone who can successfully predict the stock market can do well financially. Yet, the harsh reality is that no one can consistently see which direction price is going. The closest thing investors and speculators have to that magical crystal ball is stock forecasts. Provided free or at a premium, these reports are used every day by novice and experienced investors alike to guide their decisions in the financial market. But how accurate are these forecasts?

Who Makes Them?

Independent financial pundits, investment banks, hedge fund managers, and research analysts usually give out a stock forecasts. The latter group comprises financial professionals tasked to analyze the financial stability and growth potential of companies. They look into standard metrics, including earnings and revenue growth over X years and market conditions. Analysts look at how large a sector is, how much market share company Z has captured, how fast it’s growing, and so on.

What are Stock Forecasts Comprised Of?

Once a research analyst completes their analysis of a publicly traded company, they then make predictions that may include earnings per share, revenue, and share price. EPS tends to be one of the most followed metrics that investors look at when gauging a stock’s financial health and growth potential. It is calculated by dividing the total net income produced in X period of time by the company’s total outstanding shares.

What Forecast Accuracy is Good?

Perhaps the most common question that analysts and business experts get has to do with the level of forecast accuracy. What constitutes a good level of forecast accuracy? According to Money Morning, Nvidia stock prices can jump up by as much as 190 percent by 2025. But how accurate is that statement? Experts say that gauging forecast accuracy requires understanding the role of demand forecasting in hitting company targets, what factors affect attainable forecast accuracy, and how to assess forecast quality.

What Tools Are Used for Forecasting?

Predicting market performance isn’t rocket science, but it does involve some complex tools that may intimidate the average Joe or Jane. In addition to the metrics aforementioned, most analysts and investors alike use momentum, mean reversion, Martingales, and value to predict market direction and performance over time. Here is a brief walkthrough of each of these market performance predictors:

  • Momentum. Which direction is the price currently headed to? As the old adage goes, don’t fight the tape. If the price of a stock is heavily moving towards one direction, don’t get in the way of it.
  • Mean reversion. This refers to the tendency of stock prices to converge on a median value over time.
  • Martingales. The term pertains to a mathematical series that assumes the best forecast for the future price is the current price.
  • Value. Value investing is a time-and-tested strategy of buying cheap stocks with good potential. This search for value often brings you to a company stock’s price-to-book ratio and price-to-earnings ratio.

Stock forecasts will unlikely reach 100 percent accuracy. But the more accurate it is, the better your investing or trading results are in the long term.

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