Unfortunately, investors mistake the stock for being equal to the Business.
When the Business performs, the share price increases. Not quite! This mistake will not only cost you money, but it will also probably make you hate the stock market without a valid reason.
So let’s break down Stocks vs. Business together!
Why?
Stock prices don’t always align with how the business is doing. This is because stock share prices are based upon predictions, revenue, announcements, etc. When a company’s earnings report for Q1 is released, for example, it was predicted that the company would earn 1.7 billion dollars in revenue. Still, the company just fell short of earning 1.68 billion dollars. This, in turn, will cause the price to drop because large investors expected the company to do better and are now worried about the company’s future.
The same goes for announcements, if Ford announces it bought the Bugatti division of Volkswagen as a hypothetical, the share price of Ford would go through the roof. However, if Ford announces that it has decided to let some workers go the share price will fall. It is all about how the company looks to the outside world, its earnings, and its predictions.
How do you Prepare?
Preparation for this is not a complicated process at all. You just need to understand what the company does before you invest in it because you should never invest in something you don’t understand. You should also monitor the company’s earnings reports for all four quarters, check their announcements to the press, on their website, etc and you should study what investors predict about earnings generated.
Lastly, you should be mindful of investors’ attitudes toward the stock. Do they believe it is bullish or bearish? Do they think that the company is being run poorly? Is it time for a change of leadership? Did a CEO with a good track record leave the company? All these things should be monitored and checked regularly.
Why do Investors fall for this?
When investors start their journeys they overlook learning certain things, because they are deemed unnecessary. One of these things is thinking that the stock is the same as the business.
Jeff Bezos summed this up perfectly during an interview when he said “I never spend any time thinking about the daily stock price; I don’t”.
Although he never gave an explanation why it is most likely because when Amazon was making huge amounts of money in profit and expanding their business into grocery stores, streaming services, and ring doorbells the stock price was still tanking. The Investors who looked at the stock like the company was baffled by this.
I was not, because I understood that stocks are based upon predictions and for that quarter Amazon fell short of the expected amount of profits by a tiny proportion. This caused the stock to tank.
How does this knowledge help Investors?
Naturally, some investors will scoff at the information this article has relayed for them. Therefore this is the final attempt at altering their thinking. Dear investors with this knowledge you will understand why your selections of stocks might not be performing as you had expected.
You will also benefit from understanding that you need to research your stock picks more carefully, before just concluding to invest in the likes of Amazon and Apple, because of their good track record over the years.
The simplest of adjustments often equate to making more money in my experience so they are not to be overlooked.
