Picking stocks can be an extremely difficult process, even for seasoned experts. Some liken “playing the stock market” to be a form of legalized gambling since company stocks can go up and down wildly on any given day. Throughout history, investors have seen many companies rise from nothing to become icons of industry, only to them crumble under the weight of their own infrastructure and fade back into obscurity. Financial advisors will often suggest to investors that they should diversify their portfolio by putting money into a number of stocks, bonds, and cash instruments. For most individuals who do not want to take the time to research specific stocks, this is accomplished by investing their money in a nice, balanced mutual fund. Still, there will always be people who like to invest directly in companies, either because they enjoy the investment process or because they believe that they know something about that particular stock. Therefore, here are a few thoughts on what the stock price might tell a person about a company.
Building a reputation
In general terms, the stock price says something about the reputation of the company. Typically, this is mostly financial but there are also elements of general perception, as people can associate certain factors or situations with a particular company. Obviously, this can be both good and bad, depending on the events that are involved. However, the general reputation is always a factor in the stock price, as investors typically like to invest in “good” or “well run” companies.
Thoughts on a sector
The stock price can also say something about investor’s thoughts on the sector as a whole. In financial terms, a sector refers to a group of companies that produce the same or similar products to one another. When something bad happens to one company in the sector, this may impact the price of every company in that sector, particularly if investors feel that there will be a ripple effect to other companies. Sometimes this ripple effect is caused by consumer behavior, changes in technology, scandals, or government regulation.
Money in the bank
From a historical standpoint, a stock price can be the result of past earnings. A larger, more well-established company may have a higher price due to the fact that the institution has been around for some time and it is perceived as an entity that is stable going forward. When it comes to investing, people are often future-focused, but there is certainly a strong element of financial track record. Therefore, a stock price may be driven by the fact that an institution has consistently proven itself and weathered various financial difficulties over the years.
Earnings in the future
Finally, the stock price will often reflect people’s attitudes regarding the ability of that company to make money in the future. Investors typically have a “what have you done for me lately” attitude, and a stock price can often fluctuate quite a bit from one quarterly earnings call to the next. When people invest, they obviously want to make money in the future. Therefore, the stock price can really be set by what people think the company will make, even if that money is not yet in the bank. In some ways this can be a bit deceiving, particularly if actual future earnings turn out to be less than expected. Therefore, investors always have to balance a stock’s potential with its actual accomplishments before investing a large sum of money.