As a beginner trader, you should learn the statistical nuances of the stock market. However, many people consider this market a challenge for statistical analysis. For example, knowing the statistics and data of a stock does not allow you to beat the market and earn extra money.
Of course, it might take you a few months to understand the stock market’s statistical analysis. Every day, billions of shares are sold and bought. That means the data sets presented yesterday might not be viable today.
In this blog, we will discuss a few statistical analysis methods used in stock market trading.
Why Is Statistics Important for Stock Traders?
Stock market traders gain immense benefits from financial statistics. With it, you can collect data on stocks, predict their viability, and build realistic expectations. Moreover, statistics let you understand how the stock market works.
As a trader, you need to master risk-taking abilities. One way to do that is to use a statistical concept called the coefficient of variance. With it, you can determine the extent of risk and volatility compared to the ROI. If the ratio of the standard deviation is lower than the mean return, you can expect a better tradeoff.
You should master this particular concept to achieve efficient outcomes. Some investors and traders take up online statistics courses to improve their understanding. It helps maximize their chances of winning in the stock market. According to Proprep, anyone can improve their understanding of challenging statistics concepts with such study guides and courses.
Statistical data simplifies the execution stages of the investment process. It helps you perform back-testing and scenario analysis. Therefore, you can easily trade assets based on the expected returns.
Traders can combine statistical analysis with historical precedents to determine stock expectations. However, stock market statistics should be relevant, exclusive, and timely. Ensure that the statistical data collected is representative and comparable as well. Otherwise, its viability and functionality would be questionable.
3 Ways to Use Statistical Analysis for Investment
#1. Price-To-Sales Ratio (P/S)
A P/S ratio represents the value placed on each dollar of an organization’s revenue. You can calculate it by taking the combined market capitalization and dividing it by yearly sales. You can determine the PSR value based on these:
- A low number represents an undervalued stock price
- A high number represents an overvalued stock price
Both the low and high P/S ratios are calculated based on competitor research. You can use this to compare the stock’s viability in the industry. Moreover, the P/S ratio also determines the ‘correction’ of a stock’s price. A stock market correction means the price will decrease by 10% to 20%.
#2. Price-To-Equity Ratio (P/E)
The P/E ratio helps determine whether a stock is overvalued or undervalued. This value determines the company’s worthiness if it is broken up and sold. It is the ratio of a stock’s share price to the organization’s earnings per share compared to all listed companies.
Let’s say a small company has equity of USD 50,000 and 200 outstanding shares. For each stock, the book value is USD 10, while the market value is USD 20. Then, the P/E ratio of the shares would be worth more than their book value.
In some cases, you might find a negative P/E ratio. It means the company has no potential for future growth, and investment can turn into negative profits.
#3. Price-To-Earnings Growth Ratio (PEG)
A PEG ratio is a crucial statistical finding to help you understand the intrinsic stock value. Ideally, this value is determined by calculating the company’s possible future equity and present value. It is the ‘actual’ worth of the stock.
The PEG ratio is a valuation metric that helps determine trade-offs between:
- Earnings per share (EPS) growth
- Company’s expected future growth
- Price of the stock
You can statistically calculate it by taking the P/E ratio and dividing it by the EPS of a particular stock. A low PEG ratio refers to positive growth and a secured financial future.
However, the stock market might not reflect a company’s short-term PEG ratio. You can evaluate this if you are planning to hold stocks for the long term.
The Bottom Line
A beginner trader can use statistics to research and analyze the intricacies of the stock market. As you can see, statistical analysis lets you understand the share’s value. With it, you can determine improvement methods for your investment portfolio.
In 2022, 58% of American adults invested in the stock market. These traders loved the free-market economy. Therefore, they utilized statistical analysis to maximize profits from dividends, capital gains, and financial achievements.