Market Timing

Forecasting the rise and fall of certain stocks in the market has been the obsession of many involved in stock trading especially those that have been in the market for so long. Before anything, it might be well to define one thing that has a direct connection to it; market efficiency.

Market efficiency asserts that all prices of stocks are an accurate reflection of both its current and historical information. Simply put, it means that the price you pay for a certain stock is based on the available information for that stock. If it is undervalued, other investors will already invest in it until it ceases to become one. In essence, it means that you can never find money in any denomination just waiting around for you to pick it up. This is how the market efficiency hypothesis works.

With this hypothesis, one cannot accurately predict the rising and falling of stock prices. If that happens, it will have a negative and chaotic impact on the stock market. If for example it is forecasted that all stocks will fall down, every investors in the market will be falling against each other to sell their investments. This will further lower the market until a point is reached where traders will again gauge stock prices as accurately priced. On the other hand, if it is forecasted that stock prices will go up, everyone will be buying stocks, pushing the stock prices even higher until again that point is reached where everyone thinks the stocks are accurately priced. It all goes with the axiom; for every stock sold, someone must have purchased it and for every stock acquired, someone must have traded it.

For some, timing the market is the way to earning huge profits on the stocks. These are the people who think they are the ones who see a market trend first and so are able to cash in on it before others can. When you are one of those who favor this kind of tactic, having a buy and hold strategy can be a wiser alternative. That means buying a long term investment portfolio that is diversified on different financial vehicles, and holding on to those investments regardless of short term fluctuations in prices of stocks. Although the task of timing the market may seem like an impossible dream, the economic rewards of such a feat are quite enormous making market timing such an enticing proposition.

There are supporters as well as detractors to this theory but one thing is certain. This job is not for the apprentice or the weak at heart. Before indulging in such a proposition, it is well to have a thorough understanding of the basics of investment. Because whatever theory you subscribe in or tactics you employ, it does not guarantee success and you will find yourself always getting back to basics. Market timing may sound like an alluring suggestion, but such complications may well be best left to professionals.