The challenges of making predictions

While the stock market is not predictable, investors can still make informed decisions by looking at certain parameters. Three important ones to consider are stock valuation, the trigger event, and personal logic.

Stock valuation is the determination of the worth of a given stock, current or projected. When looking to buy or sell stocks, investors will typically compare the actual value of a stock to its fair value, which is a broad, estimated measure of the worth of a security or asset. Generally speaking, when the actual value is lower than the fair value, the stock is usually worth buying. Conversely, if the actual value is higher than the fair value, the stock would be considered overvalued and probably better to avoid. Because fair value is often calculated via different methods, investors may end up using different fair values for a specific stock to compare the actual value to, and that makes it tricky to figure out if a stock is overvalued or not.

Foreseeing changes in market trends is also important to consider when making trade decisions. Understanding which triggering events will cause a reversal in trend can help you reduce the chance of experiencing losses from poor or trading decisions.

Ultimately, every investor will have to come to a decision based on the data that he or she has obtained from research and analyzed. That said, it's not possible to have all of the facts in order to guarantee a win since there are just too many variables at play. This is where logic and emotions come in—even the most analytical investor will have to rely on personal reasoning and accept some risks.

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When should you buy or sell?

Determining when you should buy and sell is a critical part of the investing process. But just like anything with the stock market, timing is not clear-cut when it comes to making trades—there aren't specific buying and selling periods that are assuredly advantageous.

Though, there are some general rules of thumb investors can try to follow. For example, in some cases, buying stocks when they are undervalued or if prices have fallen might be worth it if, based on well-informed predictions, those stocks will see an upward trend in the near future.

That said, patience is also key in those situations because an undervalued stock will take time (sometimes even years) to trade up to its true value. Of course, purchasing decisions based on projections always come with a risk, as such projections may not be as accurate as one may initially believe.

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