Factors to consider when trading the stock markets

Traditionally these investment flows were done through professionals: financial advisers, banks, asset management and institutions, but lately, and thanks to the development of new technologies produced by online brokers, direct access to the markets is allowed with reduced costs through financial instruments such as CFDs or DMA.

The interest of retail investors has increased, and with it the need to know more deeply about the operating mechanism and the fundamental factors to consider when investing.

The objective has always been to select the stocks that can benefit most from the circumstances of each moment and, very importantly, choose the right moment to invest.

To achieve this, two fields of analysis must be approached. One, that of the macroeconomic scenario that favours the performance of stocks in general or stock market indices, and the other, in the case of individual stocks, is the microeconomic data that provides information on the possible evolution of each company.

On the side of macroeconomic analysis, the following should be assessed:

1. The risk sentiment of the investor’s risk. Here we can divide it into a risk appetite mood. Investors come out of safe-haven assets, such as treasury bonds or some currencies such as the Japanese Yen or the Swiss Franc, to place their money in riskier investments, such as stock markets, in search of higher returns. In risk aversion mode, the flows circulate in the opposite direction.
2. Economic factors, such as the monetary policies of central banks, interest rates, inflation or inflation expectations, GDP growth, the behaviour of the currency in which the investment is made, etc. In principle, rising interest rates tend to act initially as a brake on increases in the value of stocks, although not at all. There are stocks that benefit from higher interest rates, such as financial stocks. However, highly indebted stocks with high financing needs, such as utilities or technological ones, would be negatively affected. Inflation is another factor to consider insofar as if it remains at high levels; it encourages more restrictive monetary policies and, of course, the growth of the economy, which is the primary driver of the evolution of companies.
3. Geopolitical factors. Political tensions, such as the one that occurred between the United States and China with the trade war, negatively affected market risk sentiment and natural catastrophes, such as the one experienced with the pandemic crisis. On the other hand, when the scenario is calm, it favours investments. It is essential to monitor the evolution of international political relations closely.

Once the macroeconomic scenario has been analysed to determine if the circumstances are conducive for investment, we select the stock with the microeconomic analysis.

Here the following should be assessed:

1. The industry performance of the sector. Suppose better relative performance is expected, the growth expectations of the industry and the company’s situation concerning its competitors, in the same line or a possible under performance.
2. The quarterly publication of earnings and estimates that are provided in its periodic reports. Here, the evolution of indicators, such as earnings per share and price to earnings ratios (PER), must be analysed to determine the company’s revaluation potential.
3. The announcement of dividends may attract the interest of investors in search of income.
4. The presentation of new products or new contracts that increase the company’s sales.
5. Potential takeover or mergers that involve an increase in the value of the stock.
6. The labour relations policy, either due to an increase in staff or layoffs, which in one case or another affect its cost structure.
7. Changes in the management team that have a relevant impact on the internal policies of the company.
8. And finally, the reputational risk. In cases such as management errors or legal problems, the value of the share may be affected.

For all of the above, both in the macroeconomic field or the analysis of the company, it is essential that the individual investor knows how to select reliable sources of information such as specialised media with proven reputation and/or through brokers that have recognised professionals and provide useful information to their customers.

Miguel A. Rodriguez, chief market analyst at CAPEX.com