Education Series | May 30, 2017
Representing Companies’ comparative stock market returns for easy reference and analysis.
Price performance is one of the most important components used for stock analysis by traders and market timers. Different analysts use different methods to indicate trends in the stock price. While some use percentage return of last three months, others use percentage return of last one year. Some analysts, on the other hand, also use trending chart pattern and other indicators like RSI, moving averages, wave theories etc. As a result, we have different opinions for the same price data of a stock that sometimes leads to confusion and ambiguity.
Moreover, common investors are not much familiar with various technical indicators and face problems in interpreting charts as it requires having a statistical background and even professional training in this regard. Thus, is a need for an indicator which may represent price performance in a simple and non-ambiguous manner. Also, an efficient analysis must incorporate a comparison of stock’s price performance against self as well as price performance of its peers.
Price score is one such unique indicator which captures price performance of various duration and represents price performance of stock vis-à-vis its peers with a single number and in clear manner. Price score is a number in percentile form which suggests the ranking of a stock in terms of Price performance and also tells the % of companies that are performing better/worse than a particular stock. Owing to its clear advantages over other indicators, some form of price scores is used extensively by professionals worldwide in quant based trading.
Take an example: Say the Price score of a stock ABC Ltd. is 85, it means that ABC Ltd. is performing better than 84.99% of stocks listed in the Stock Exchange. Conversely, it can be said, that only 14.99% of stocks listed in the Indian Stock Market are performing better than ABC Ltd. The higher the price score of a company, the better is the performance.
Method followed for calculation of Price score
Returns of all the shares which are part of top 99.5% of Indian market by capitalization (universe of EW All Share index) is calculated for three different rolling time frames. Then the companies are ranked separately in order of return produced in these time frames. Thereafter, a combined rank of each stock is calculated, which is an average of the three ranks.
Now the final rank is converted into percentile to give a unique price score to each company. Price score is calculated daily.
Features and advantages of using price score
1) Price score is a number specific to the company.
2) A company can have price score of any value in the range of 0 to 99.99 depending upon its performance in the market vis-à-vis other stocks in the market.
3) It is a percentile based score and thereby the price score of a company states the percentage of companies that have given return lower than its own return.
4) When we subtract the price score of a stock from 100, it tells what percentage of stocks performed better than that stock in terms of price. For example, price score 60 for a stock implies 40% of total stocks have performed better than that stock and the rest 60% have underperformed that stock.
5) Just the way an index is important to understand the overall market movement, price score or any other similar measure is important for assessing the movement of a stock.
6) Price score also readily helps in identifying stocks that have underperformed or outperformed the market.
7) Change in price score helps in identifying companies that are catching the attention of investors.
8) A company’s price score along with other fundamental variables such as its valuation and earning growth creates a basis for picking stocks from the market.
9) Clubbing price scores of stocks in a sector or an industry helps in knowing price score of that sector or industry.
10) Many a time analyst identifies companies on the basis of earning and growth characteristics and uses rising price score as a trigger for timing a ‘buy’.
11) The return produced by stocks during time periods (such as intraday, daily, weekly or monthly) helps in predicting the future market trend.
12) Rules based on price score help creating a quantitative portfolio.