Question

Hello

How I know if the price of a stock has reached the highest potential??

Also, if the prices of stock is not changing very much there’s no huge increase or decrease isn’t that an indicator for stable and successful company ??Also, the income of the inc. is increasing each year However, it didn’t declare dividends for two years but as you answered that it may retain it for bigger investments and that may return high after some time ??

Also if the arrow is green is that good or bad or doesn’t matter for investment?

Is it good choice for investment ??

I wish you answer in detail coz I am little lost

Thank you in advance ????????

Answer 1

Hello

Each of the question, you asked is quite subjective in itself and different experts may have different views on this. So, don't be too rigid on my views and I'll suggest you to understand the concepts and then have your own view point on this.

Now, coming to your questions:

How I know if the price of a stock has reached the highest potential??

I will say, we can't say with 100% probability that the stock has reached its highest as in the end it is based on human behaviour and human behaviour is subject to so many anomalies of the efficient market.

But yes, we can have a idea of the level by analyzing the technical charts and searching for bearish reversal patterns and by calculating the intrinsic value of a company by evaluating the future economic benefit of holding the common equity of the company under discounted cash flow model. But again, these levels are subject to market sentiments of fear, panic and greed which involves human behaviour.

Also, if the prices of stock is not changing very much there’s no huge increase or decrease isn’t that an indicator for stable and successful company ??

I would say, if the price of the stock is not moving too much, this implies that the company is earning returns that are just par keeping its risk profile and industry in which it is operating in mind.

It can indicate a stable company but it may not indicate a successful company.

Also, the income of the inc. is increasing each year However, it didn’t declare dividends for two years but as you answered that it may retain it for bigger investments and that may return high after some time ??

I'll answer this by using a simple example.

In India, the property and assets of father are inherited by their sons after death or at will.

So, when in the younger age, a child ask for pocket money from his parents, they decline by saying It's time to study and boost your career and its not the time to substitute enjoyment for studies and don't worry about anything, "EVERYTHING WE'VE EARNED AND ACCUMULATED IS YOURS ONLY".

Now, watch the scenario of company in light of the above statement.

As a holder of common equity of the company, anything company is earning is ultimately your earning, no matter if you get it today or not. The company will distribute dividend in lack of investment opportunities but in the golden time of the company, when it has opportunities, it may not declare divident for a decade, but if the company is investing wisely, you'll see the effect in the capital appreciation rather than receiving dividends.

Also if the arrow is green is that good or bad or doesn’t matter for investment?

Is it good choice for investment ??

I couldn't exactly understand what you are asking but upto the extent I do, I don't think that a green or red arrow in very short term matters as it can be a result of overall macro economic conditions and global market. But it do matter in short and long terms when macro conditions tends to stabilize and THE RETURN on the stock in that short/long term will matter and will be a key factor for classifying it as a good/ bad investment. A green arrow on a specific day or a particular week can't judge the potential of a company.

These were my views. I hope you find them consistent with the market conditions and scenarios.

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.