The stock exchange market is one of the oldest. Despite high risks, many investors choose it thanks to ample opportunities for increasing the profitability of investments. Nowadays, not only “the wolves of Wall Street” can access the stock market. It is also available to common traders via contracts for difference (CFDs). To try stock trading in a form of CFDs, you can register an account with InstaForex, an international brokerage company.

To trade stocks efficiently, you need to know the principles of securities price formation and learn how to forecast price changes.

What does a stock price reflect?

A stock is a security issued by a company. Every stock has its value and price.

The stock value can be nominal, issued, and reported:

  1. The nominal value reflects the stock value at the moment of issue, that is when the stock is put into circulation. This value is a result of dividing the capital of a joint-stock company by the number of issued securities. The nominal price is displayed on the most valuable security. It also determines the share of a holder in a company.
  2. The issued value factors in the supply and demand when stocks are listed in the market. The issued value cannot be lower than the nominal one.
  3. The balanced stock value is formed as a result of the difference between the amount of equity and borrowed capital per 1 security.

The market stock price (a quote, a rate) is how much a security is valued in the market at a certain moment. The price formation depends on the supply and demand ratio. The higher the demand, the higher the price, and vice versa. Besides, the stock price is influenced by capitalization and split.

What does capitalization show?

The capitalization level is calculated by multiplying the market price of stocks by their number. The market capitalization does not precisely reflect a company's performance. In fact, it all depends on how optimistic or pessimistic investors are about the future of the company. The sentiment can change very quickly. One piece of news is enough to reverse the trend. And this is not a matter of profit: it can be a political statement or a message about the competitors’ actions.

For example, when air borders with Europe were closed during the pandemic, it has led to a drawdown of American airline stocks to 19% from 14. On the other hand, shares of virtual entertainment companies such as Electronic Arts saw a skyrocketing rise during self-isolation.

There are three levels of capitalization: small (up to $1 billion), medium ($1-10 billion), and high (from $10 billion). Mid- to high-cap companies are considered the most stable, while small-cap companies often demonstrate the prospect of rapid growth.

What are a stock split and consolidation?

Issuers split their stocks in order to attract new investments. For the stockholders, such a split does not make any difference. It is the same as if they exchanged one $100 note for two $50 notes. While the sum owned by an investor remains the same, the market stock price declines. As a result, the stocks become more attractive to investors.

The stock consolidation is a backward split. In other words, an issuing company converts several stocks in circulation into one. In most cases, it signals some problems on the issuer’s side or a possibility of an upcoming merge.

How to invest in stocks properly?

A sound solution is to analyze the market.

There are two analysis methods:

  1. The fundamental analysis factors in the performance of an issuing company, macroeconomic indicators, financial statements, and analysis of competitors’ activities.
  2. The technical analysis is based on price charts. It implies analyzing time frames and indicators in order to find a pattern showing the right market entry point or the underlying trend.

Importantly, before you start investing in a stock market, you should acknowledge that the stock price and the stock value are not the same. Investing in CFDs requires an understanding of how the stock price is formed. This process is influenced by numerous factors that are not directly connected with an issuing company’s performance. That is why it is important to analyze market trends when compiling an investment portfolio.

It is easier to analyze financial markets when you have access to a vast analytical section on InstaForex website. Seize the opportunity to use materials provided by market experts daily for predicting the price changes of stocks and other financial instruments.