Term:PROBABILITY

The chances that a certain event or outcome will occur. It has been well said that investment is not about certainty. It is about probability. When you buy a share, you are making a forecast. You are saying, “I expect this share to go up”. The problem with forecasting is that you can never be certain of the outcome. Nobody can predict the future with a 100% certainty. But that does not mean that the future cannot be predicted – just that it can only be predicted with an approximate probability of being right. So, you can say, “This share has a 70% probability of going up by 50% in the next year.” Then the question of share assessment and timing comes down to various methods to improve your probability of being right in making that forecast. Thus, if a share is heavily over-bought then its probability of going down is much greater than if it was heavily over-sold. You can use both fundamental and technical methods to improve your probability of being right when making a share selection or timing decision. The fundamentals of a company tell you whether it is likely to be a good generator of dividends in the future. The charts can tell you whether it is a good time to buy that share given its chart patterns.

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