How to forecast stock price

Forecasting stock prices is an extremely complicated process for a number of reasons. First of all, stock prices in Euronext Paris are extremely volatile. In particular, the price changes with every trade and sometimes intraday price range may be extremely large. Second, millions of private and institutional investors react to news, rumors, recent developments and so on. Of course, the magnitude of such change is hard to forecast.

One thing is when Sanofi launches a new line of medications and another when a small family store is destroyed by tornado in Bordeaux: the effect on Sanofi stock will be quite different. Finally, the question how to forecast stock price becomes almost impossible to answer for a long period (such as 12 month or more).

Luckily, there are a number of methods that private investor can use. First of all, it is possible to construct consensus forecasts based on analysts' opinions. For example, if 9 out of 10 trustworthy analysts are expecting price to increase then it is indeed likely to happen. However, if the remaining 10th analyst turns out to be correct it is possible to make a fortune by going against the market.

The second approach is by using technical analysis tools. A number of charting techniques and oscillators can be used to forecast stock price. The underlying assumption of technical analysis is so called "mean reversion" of stock prices. That is, the price of Sanofi stock will adjust to a long-term price. The issue with technical analysis is that signals are often misinterpreted by traders. Finally, one can use financial time series methods to answer the question of how to forecast a stock price. Stock price forecasts are built around a model such as AR model of order p or ARMA-GARCH model. Typically, you need an advanced degree to build such models but luckily a number of websites offer stock price forecasts for the most popular stocks.

How can you use the forecast of the stock price? Ideally, if you would prefer to hold a long position for a stock that is about to rise. If Sanofi stock is on the rise you can make money by selling it at its peak. It is possible also to profit whet you know that price is likely to decline. In this case you hold a short position. Suppose that Danone stock price will drop and you know that for sure. Then you can borrow stocks and buy them cheap.