Factors Affecting the Perceived Value of a Stock

The most common factor affecting how investors' perceive the value of a company is by its earnings. If you don't know what earnings are (really?): they are the profits a company makes (commonly referred to as "the bottom line").

So, if a company doesn't make any money, it's doubtful it will stay in business - thus the perceived value of the company falls.

Investors, and the inbred mules on Wall Street, watch earnings reports like hawks. If a company reports better than expected earnings, they will pile into the company, thus demand rises. If the results are worse than expected, expect the price to plummet. And since companies are required to report their earnings four times a year (every three months - referred to as a "quarter"), you can bet that there will be many occasions for stocks to swing back and forth like a wild monkey on a swing.

Other reasons the price of a stock will rise revolve around good news such as analyst upgrades, management restructuring or due to speculation, such as rumours of a larger company buying your company out.

Over a longer period of time, the price per share of a company will rise as the company grows and becomes more and more profitable (remember, if you own shares of a company you own a share of the profits).

Common reasons a stock will fall in price? The exact opposite of the last paragraphs: bad news regarding the company as well as analyst downgrades are some examples of why stocks fluctuate in price.

If learning about all this seems daunting to you or you are thinking that this information is only available to insiders (employees of companies), there is a good chance you are poor. The beauty of the stock market is that it is built to be fair for everyone (or at least is supposed to be), meaning that you have access to the same information as any insider. So now you don't have any excuses for not being rich, sorry.

The Tale of Risk

Of course, when you invest in the stock market there is always some element of risk involved. Then again, whenever you engage in any activity there is some element of risk involved, for instance when you are riding your bike to class there is a chance of you hitting a bump and, long story short, end up with bits of your head all over the road. There is even risk when you are reading a book: those sharp corners plus your eyes can equal an unpleasant trip to the hospital.

That's why you should wear a helmet when you go biking or wrap your books in foam when you are reading in order to mitigate your risk as much as possible.

Of course there are many people who choose not to be prepared with a helmet handy for when they have their lives flashing before their eyes as they are falling off their bike head-first into the concrete in slow motion.

Granted, a very small portion of people end up with pieces of their heads missing when they go biking so it would make sense for them not to want to wear those clunky helmets. Then there are the bikers who bike down the middle of the road while keying cars and running over koala bears. For these types of reckless people, a helmet would be a good idea, yet many still don't wear one.

This analogy of bikers and risk applies directly to investing. As there are different types of bikers there are different types of investors. Some choose to be safe and take necessary precautions in order to avoid having to sell their organs in order to pay off the bills (equivalent to wearing a helmet while biking) while others are too busy recklessly investing without doing a smidge of research and thus end up not noticing the wall they are about to collide into...head-first...with no helmet...while riding their bicycles and losing all their money. Karma is sweet.

I can go on talking about bicycles, pieces of head all over the ground and throw in a random reference to investing every now and then but I think you get the idea.

There are many investment strategies that will reduce the risk that comes with any investment such as dollar cost averaging, diversification, asset allocation or even investing in mutual funds. Again, I do not want to get too technical in this article so if you are interested in all of the investment strategies available to you then head over to my website which will be linked to at the end of this article.

All you really have to remember about stocks and risk is that the fastest growing stocks tend to be the ones that are the safest. Many people will launch boulders and packs of man-eating Rottweilers at me for saying what I just said, but then again doesn't it make sense that the more people are buying of something, the better the quality?

There's a reason Apple sells iPods by the pound while its stock price went from $2 to $200 and why Amazon is considered to be the next of kin to Jesus - and I dare anyone to tell me these stocks were "risky". There are thousands of other such examples, but I'm too lazy to list them all.

And as for the people who say that investing in the stock market is the same thing as gambling? I'm not even going to dignify that with a response.

Factors Affecting the Perceived Value of a Stock

by Mr. Moneybags.

Disclaimer