Forecasting is known as a strategy of operating the historical data in the capacity of metrics. The aim is collecting assessments in order to foreshadow the upcoming financial trends. A practice can be used as a planning tool. Therefore, enterprises distribute their financial facilities or lay out potential expenditures for the future time period. So, as a rule, the demand on items is forecasted.
Who uses Forecasting
The method is applicable by certain market players, but everyone pursues their own ends.
Let’s split off the goals of various actors:
- Investors apply forecasting, in order to define the circumstances, influencing the enterprise as a whole, for instance, sales expectations. The practice is introduced as a significant company benchmark, defining the future perspectives.
- Statisticians introduce the method as a monitoring tool for predicting the effects on a commercial activity. A case, in particular, is the rearrangement of working conditions and its influence on the personnel.
- Trade floor analysts take into account historical data to estimate the GDP level and the unemployment rate in the period ahead.
- Economists use the method to examine the situation from various angles. It has to be done before the designation of variables. Then the data array is set, established on the above-mentioned parameters, in order to execute the information processing. A last step starts, when the foregoing calculation is placed against the real-time data.
Stages of Forecasting
No doubt every investor strives not only to save money, but also to increase the amount of committed facilities. Especially the competent one, whose aim is to derive the maximum profit. That’s where the forecasting techniques are being applied. Each stage of this process is significant.
As a basis for forecasting strategy, there exists an analytical top-down approach:
- Overall market state should be taken into account. Financiers examine the investment potential and make a decision, whether they are willing to put up the capital or not. An outcome can be considered the evaluation of the most appealing sector for future investments.
- Forecasting of the above-mentioned industry takes place. Fund providers study in-depth the upcoming tendencies of the sector via business cycles. A long-term steady growth of the chosen sphere is esteemed as a favorable indicator.
- Particular choice of investing objects is expected. If the previous stages anticipate a selection of the certain branch, the third step implies specifying one feasible entity, for instance, IT-company.
As a result, a choice in favor of the specific method should be made during the listed stages. Let's review these forecasting techniques in the next paragraph.
Actually, it should be noted that different forecasting methods can be applied to define the fluctuations of the common-stock value. In fact, relationships between the variables are determined.
Now let’s consider two basic ways to foreshadow the upcoming market changes:
- Qualitative analysis, as part of forecasting, involves statistical reviews. No market players’ comments are touched upon. The method is considered as an impartial one.
- Quantitative analysis contemplates elaborating assumptions of limited coverage. By the way, these practices should be used in a near-term outlook, as the market view is the key indicator.
So, the key difference between the two above-mentioned forecasting approaches is outlined as follows: the quantitative analysis intends a market survey and a subject matter evaluation, whilst the qualitative one presupposes a reliance on historical data.