A stock of a corporation signifies ownership in the corporation. A single share of the stock represents a claim on fractional assets and earnings of the corporation in proportion to the total number of shares. For example, if an investor owns 50 shares of stock of a company that has in total 1000 outstanding shares, the investor (or shareholder) would own it and have claim on 5% of the company's assets and earnings.
Stocks of a company can be traded between shareholders and other parties via stock exchanges and organizations. Major stock exchanges include the New York Stock Exchange, NASDAQ, London Stock Exchange Group, Shanghai Stock Exchange, and Hong Kong Stock Exchange. The prices which a stock is traded at fluctuate, essentially, due to the law of supply and demand. At any one moment, the supply is the number of shares that are in the hands of public investors, and the demand is the number of shares investors want to buy. And the price of the stock moves up and down in order to attain and maintain equilibrium.
In general, investors want to buy low and sell high. This sounds simple enough, but it is very challenging to implement as it is monumentally difficult to say whether a stock will go up or down. There are two main streams of studies attempting to understand factors and conditions that lead the price changes, or even forecast future stock price, fundamental analysis and technical analysis:
- Fundamental analysis focuses on underlying factors that influence a company's value and business, including overall economy and industry conditions from macro perspectives, company's financial conditions, management, and competitors from micro perspectives.
- Technical analysis, on the other hand, predicts future price movements through statistical study of past trading activity, including price movement, volume, and market data. Predicting prices via machine learning techniques is an important topic in technical analysis nowadays. Many quant trading firms have been using machine learning to empower automated and algorithmic trading. In this chapter, we will be working as a quantitative analyst/researcher, exploring how to predict stock price with several typical machine learning regression algorithms.