The stock price is one of the important factors that investors look closely into when deciding to buy or sell stocks in the market and on their portfolio. There are two types of prices that investors should always know- the current price of the stock and its future selling price. It may look easy enough for people to base their investing decisions by virtue of knowing the current and the future selling price of a stock.

Many investors try to look at the stock price to gauge market performance. Many investors continually try to review the price history of a certain stock and use that knowledge to predict possible price changes as well as use it to influence their investment decisions. Some investors may form certain biases that can be influenced by the price of a stock.

There are some investors who may avoid buying stocks that have risen its price too sharply, believing that it may be due for a correction at any time. Others will try to avoid buying a stock experiencing a drop in price believing that it will continue to go down. But would such beliefs be considered as fact? Will a stock’s price be a credible gauge to determine its market performance?

Market Trends

Momentum seem to play a big part in a stock price. There is a common stock market wisdom that tells investors not to "fight the tape". This means that investors should not try to go against the momentum of the prevailing trend. This assumption is based on the belief that the market would continue to move in the same direction and the best bets would be on stocks that go along that direction.

This may have some grain of truth in them, especially when you look at how most investors normally behave. Stock investors tend to bet on stocks that show price increases as opposed to stocks that are falling. And as these lead more people to invest in climbing stocks, it encourages even more people to buy. This presents a positive feedback that may go on for some time.

Martingales

But there are also instances that market performance cannot be determined by the stock price, in this case, in its past performance. There are cases that past returns of a stock may not seem to determine its future price. Past returns just don’t matter if you consider what is called as martingales. A martingale is a mathematical series of numbers in which the best prediction for the next number would be the current one.

In terms of stock pricing, stock market returns could be considered as martingales. Using this theory, the valuation of a stock does not depend on past price trends or even in estimates of future price. The stock specific inputs that can be used would only be the current price as well as its estimated volatility.