When most people enter the stock market, they use hunches, tips from friends, the fact that a popular stock has fallen in price and other hocus pocus to identify buy signals. The surprising fact is that all these methods of investing will lose money over the long run — even if you get lucky once or twice. To be a smart investor, you first need to understand the impact of supply and demand on stock price. Second you need to understand that institutional buyers are the primary force behind stock price change. Once that is under your belt, you need find a way to identify strong stocks that are currently showing unusual volume spikes. Keep reading to find my favorite source of profitable stock picks based on unusual volume activity.
Economics and the Impact of Supply and Demand
As you may know, the study of economics explains most everything you need to know about how price will change for any product. That not only includes stocks but milk, cars, diamonds, pool service, etc. There are two basic forces at work — supply and demand. Demand is the result of many people or groups wanting to buy something. The more people want to buy something (the more demand), typically the higher the price. The second force is Supply and it is the result of people providing the product or service in question. The more of this product or service that is available (the more supply that is available), typically the lower the price. These forces can easily be illustrated in a supply and demand chart.
Institutional Buyers and Volume
“It takes big demand to move supply up, and the largest source of demand for stocks is by far the institutional buyer.” — William J. O’Neil
To select good stocks with good growth potential, we need to identify spikes in volume for good companies. ©Investor’s Business Daily’s newspaper (IBD) daily teaches the traits of big winners and the influence that institutional investors have over stock prices. Institutions such as mutual funds, pension funds, and banks buy and sell stocks in large blocks (they are causing large increases in supply when they sell and demand when they buy). These large transactions tend to drive prices up or down depending on the degree of buying or selling. Stocks are just as subject to the law of supply and demand as any other product. When demand for a stock increases and supply decreases, its price usually increases. Conversely, stock prices tend to fall when there is an more supply of shares or decreased demand.
- IBD identifies stocks with heavy institutional buying activity and provides exclusive lists of those stocks poised for big price moves.
- On Monday, the paper lists the 50 stocks with the best potential for large gains.
- Another tool they have is the IBD Stocks on the Move table that reports stocks with both high traffic and excellent long term charts.
I personally have used the table to select 5 stocks for our article “Stocks to Watch.“ In only two weeks, this list had one stock gain more than 36.5% with average gains exceeding 8.5%. To get other stock trading ideas and help your portfolio grow, we highly recommend getting a subscription to IBD.
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