The Importance of Understanding Market History
If you consider yourself a diligent investor, you likely make use of numerous tools to help you make your decisions. After all, investing can be a dangerous game if you don’t do your due diligence.
At its core, the stock market is influenced by consumer confidence and thus can seem like a guessing game. However, the reason that some people become so successful at investing is that they utilize all the tools at their disposal to make the most educated investment decisions possible.
To name a few ways to make better investment decisions, you can analyze current and prospective market trends, take a deep dive into the financials, create models, and with that information do your best to predict which companies will succeed in the stock market.
Those are all surefire ways to increase your chances of making a net return. But nowadays, one other helpful metric is at risk of losing its popularity in the financial realm: market history analysis.
Market history has long been one of the best ways to predict how a stock will react to events, and today I’m going to tell you why this practice isn’t heading towards obsolescence any time soon.
What is Market History?
Market history is an incredibly broad term, but it can be boiled down to just a few points. Of course, when used in a general sense, it refers to all previous behavior of the market in reaction to certain events, positive and negative.
Some examples of US market history, for example, hold more weight than others; we have Y2K, the post-9/11 era, the Great Recession of 2008, and now the worldwide pandemic. These are some examples of market events of historic proportion, though market history encompasses more than just these.
For certain industries, troves of information are at your fingertips. If you want to know what historical events have greatly boosted defense stocks or the consumer goods sector, it’s almost as easy as a Google search.
The reason that identifying the effects of these events/eras on the stock market (individual sectors and the whole) is so vital is that analyzing market history allows us to discover similarities in current and future events. Knowing how things affect prices and certain industries in the past can help you make better decisions when you see parallels in the current day.
Overall, market history is one of the best ways to predict the future.
Is Market History Still Relevant in 2021?
Now, that’s not to say that it’s the only way to make a good investment decision. In fact, a common thing you might hear in the modern era is that we’re living in an entirely different world, or maybe that market history isn’t going to help us as much given the boom of social media and the availability of information.
That’s not the case, at least not for now.
People may be taking market history for granted because they prefer to find their information elsewhere or focus more on the possibilities for certain technologies over worrying about how previous ones have performed.
However, while the world is evolving around us, our brains aren’t evolving at the same rate. This world is seeing globalization and unprecedented advances, sure. But deep down, we, the consumers still fuel the stock market with our confidence, and part of human nature is to repeat behavior and react on a visceral level to emotions sparked by world events.
Realizing this could help you avoid distrusting market history, as it is still a great indicator of how we will interpret events today. The most important thing in the investment realm is to remain ahead of the curve and understand how people work because it will matter financially.
How Historical Stock Data Helps You Make Better Investments
Apart from the conceptual interpretation of market history, you’ll need to know how to access the data that will tell you what you need to know. After all, without concrete data to work with, how can anything regarding market history be credible?
Luckily, there is a tool available that can be slightly hard to find initially: historical stock price data.
Historical price data is one of the most important resources when it comes to analyzing the implications of market events on stocks, and it’s all at your fingertips. On the most popular financial analysis sites, you can find a free-market history graph of a stock’s trajectory over time.
You can choose to view prices each day beginning on the date of a company’s IPO, or choose monthly or yearly to analyze performance on a broader scale.
If you want to become successful at analyzing a market history chart, you’ll want to research it thoroughly before making the jump to investing. Ask questions like, “how did this specific stock react when (insert world or industry event here) happened?” or, “how long has this stock been increasing or decreasing in the price?”
Knowing which questions to ask and how to check the answers will help you formulate the most educated guess possible on the stock’s future performance. And in the realm of investing where it can closely mirror gambling, historical analysis can give you the best odds of a healthy ROI.
The Dangers of Ignoring Historical Data
As I’ve iterated, analyzing historical market data and how stock prices react to certain things can be an incredible way to predict how stocks will act in the long run. It’s invaluable to have at least a basic understanding of current events to look out for in the present that might mirror the market effects of previous ones.
It’s essential to take into account that ignoring the significance of market history can come with a few dangers. Namely, financial dangers. When you invest in a stock, you’re investing your hard-earned money, and when you do that you take on a proportional amount of personal risk.
In any event where you take on personal financial risk, big or small, if you fail to analyze every possible angle of the investment, you could lose big. Even if you do ample research, not covering every research point could mean the difference between the success and failure of your stock choice.
So, although market history isn’t the only metric you must evaluate when investing, it could be a real kicker if one disregards its implications altogether.
Today, we covered everything you need to know about the market history and why it still remains one of the prime indicators for future stock behavior. While it may be questioned in the new age of technological advancements, globalized economies, and information sharing, it won’t be going anywhere.
I hope this has helped you realize the importance of analyzing history to help yourself maximize your investment returns going forward.