I admit, I simply do not understand the stock market. I mean, I understand what goes on there, but as to why and how and who does what, I’m totally confused.
One of the things that puzzles me most is when a company is apparently doing great, but its stock gets hammered because analysts thought it might do even better. That seems crazy to me. I mean, if one month I made $5000, and then the next month I made $7000, I’d frankly be a little miffed if the Mrs. were unhappy because I hadn’t made $8000.
Clearly I have a long way to go in my understanding of high finance, so maybe some sort of really basic instruction like this cartoon would help me.
Hi Mark, your write up is hilarious — and so true! I too have often wondered why the stock market whines when a businesses does slightly less well than expected, even if it’s doing well.
You made my day!
Current results drive expectations for future results. Future results are discounted back to calculate present value. When a company misses current results expectations, it lowers the future value which is then discounted back at a lower value. Therefore you get a decrease in stock price.
It really does go to show that some people know the price of everything and the value of nothing.
It’s quite simple. Stock market prices are incredibly efficient. They represent far more than what the company looks like on any one given day, but also what they expect it to look like tomorrow and next year, and ten years from now.
Two companies who make the exact same 10million in revenue in 2012, might be ‘valued’ by the stock market wildly differently. This depends on the preparations each company has made for the future, the potential they have for growth, etc.
So, even though a company might grow at a strong pace, if the value the stock market put on that company assumed they’d grow at an even stronger pace, then the value of that stock will go down. Simple stuff really. 😉
I’m glad it’s not just me! 😉
I think I’m even a little more confused now. Maybe it’s better I draw talking animals for a living.
Nice cartoon. Your doubt on why the stock is hammered by analysts when the company seems to be doing fine is shared by many. From what I read and understood, when the company is doing good, the big financial institutions want to buy that stock at a ‘very good’ price. So they sell and buy it at lower rates.
Morover, only when they say the performance is not upto the mark, the viewers (we small time investors) will start selling the stock and they buy it.