I’ll just copy and past for your convenience, wouldn’t want you to waste your time by making you click on a link to take you to another website.
Buy an index and it will end up having a higher value if you wait long enough. That is a uselessly correct description of the behavior of a stock index. I’ll assume that you were hoping to get a more accurate prediction, tough luck. We could get into a discussion about the fundamentals for a given company, but the stock behavior doesn’t really follow the fundamentals very well (at least over a short to intermediate time period). Depending on what you want to do, stochastic modeling can be used to simulate stock prices under specified assumptions.
All of this is rather boring though, isn’t it? If only there was an easier way to make predictions about stock prices. I am happy to tell you that there absolutely is a way to do that with close to 100% success. You can make millions using this method, seriously, I’m not making this up. All you need to do is cheat. It is that simple. I’m not going to go into the EMH here, but no matter what your viewpoint it is not hard to see that it is easy to predict short term stock prices if you have access to critical, non-public information about the company. Think about it, having insider information means that you can account for changes that others are still speculating about. You will also be able to compare your knowledge of what has actually happened to what everyone thinks the result is going to be. If everyone thinks earnings are going to be record breaking, but the result is a loss, you would expect a greater change than if everyone’s expectations were in line with the actual result.
Humans are a fascinating species and we have a wonderful tendency to do incredibly stupid things sometimes. We also love to think we have a much better understanding of things then we actually do. We also hate to consider just how much luck can impact our lives. Here is a bit of advice, ask yourself why you asked this question in the first place. If your answer is “I want to make tons of money in the stock market,” then answer the next question: “Am I willing to put in the time and energy required to compete with people who have 30 years of experience and do this as their primary job?” Alternatively, ask yourself this question: “Do I find the behavior of markets to be so interesting to me that I would greatly enjoy learning about how they work even if I couldn’t earn much money by doing so?”
If you still want to understand how the stock market behaves I’d suggest you start by mastering all of the basic concepts in finance. For current commentary on the markets read the following on a daily basis: The Big Picture, Abnormal Returns – A wide-ranging, forecast-free investment blog, PRAGMATIC CAPITALISM, The Reformed Broker, A Dash of Insight – An eclectic approach to better trading and investing, and never read anything you see on yahoo finance…EVER. If you plan on using advanced quantitative methods then add a couple of classes on probability theory and stochastic calculus to your list. Read as much about market history as you can and add psychology and economics to your reading list. Accept that you are never going to have a perfect answer and never allow yourself to fall into an ideology. If you cannot clearly state several major problems with your own theory then you are missing a hell of a lot. Spend your time learning what doesn’t work rather than trying to find what does work, at least at first. Never forget that people’s decisions are what cause the market to move, and people do not always make sense. By the time you can get through all of that, you will be able to proceed on your own.