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Concise Comprehension of The Daily Market Report



Dear Speculators,

Everyday we are bombarded by the latest financial news, the closing share prices, the top gainers and losers, the volume traded and the market capitalization. Most of the news sound like gibberish to those who don't understand what the numbers mean and it sometimes causes panic to those who know how to read the market reports. It is for this reason that I wish to take you gradually through digesting the news and acting on information.

Share prices simply reflect the equilibrium value of a financial asset as a result of the forces of demand and supply and may not reflect the true or intrinsic value of that asset at a particular point in time. The share price may go up or down depending on the demand and supply of that particular stock in the market. Any change in share prices is triggered by either a large demand or large supply of that stock in the market. The biggest influence on prices is the sentiments of the institutional investors and pension fund managers. The opening price simply informs the market participants of the current value of the stock as at the time the financial market was open for transactions on that particular day and the closing price informs the market participants of the price of a particular stock at the end of the market day. If the stock has a good day, the closing price should be higher than the opening price and vice versa.

The volume traded simply informs you about the size and number of trades that occurred in the market on that particular day. If the volume is large, the market had a busy day and large number of stocks exchanged hands. If the large volume of trade was driven by excess demand or buyers, the market will be up and vice versa.

The market capitalization data shows you the combined market value of all the listed companies on the stock exchange. If a significant amount of shares enjoy gains, the market capitalization will be higher and if there are more losses, the market capitalization will fall.

Now that you understand the simple market information we see daily in the news, let's see how we can use this information to make some money. Well the first thing to note in the market is that we buy and sell information and the financial assets are the physical instruments we exchange in such transaction. The intelligent investor is the informed investor. Sometimes prices fall for the wrong reasons and that's when you should be a net buyer and sometimes prices rise for the wrong reasons, that's when you should be a net seller. But most people don't know this. You should always research exhaustively and analyse why prices are going up or down before deciding whether to buy or sell. Fundamental analysis is the smartest technique to use and technical analysis can be combined to the fundamental analysis to get better results. Economic news, financial news, business news, political news and policy changes all influence the movements in asset prices in the market as investors attempt to digest the implications of the new information on their investments. Favourable news drive prices up and bad news pulls down prices. What may be bad news to a company may be good news to another, hence the reason for gainers and losers in the same market.

Beyond the brief stock market report, it is imperative to analyse company financial ratios and buy those with excellent financial ratios and dump those with poor financial ratios. Look for cheap stocks of high quality firms. They are hard to find but they provide the best investment returns. Market inefficiency sometimes makes the stocks of some great companies cheap at various points in time, it is smart to buy these stocks at a bargain and sell them when the stock premium is unreasonably high.

Lastly and most important, when making an investment decision, ensure you know exactly what point we are in the financial market cycle. You want to be buying stocks when the market has been down for a prolonged period of time so that you are buying the stocks cheap and prices have already bottomed out. On the other hand, you want to be selling stocks when the market has reached its peak or is near its peak. Take a step back and look at the big picture regularly. 5% up and 2% down daily market movement average may blind even the smartest man from knowing when there is a bubble and when that bubble is going to burst. Study the market cycle, study the stocks, buy the undervalued stocks and sell the overvalued stocks.

Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

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