What Makes Stocks Go Up and Down?

Daniel Penzing
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Analysts Point the Finger at P/E Ratios

More than two decades after the dot-com crash, stock market investors still seem skittish. Coming off a difficult 2016, many market experts are reluctant to take bold bets. Much of the anxiety centers on the sky-high P/E ratios of most tech stocks, which makes them increasingly vulnerable to drops in prices.

One of the hot topics among experts is the sustainability of profit margins for tech investors.

Tech companies attract investors with some of the biggest P/E ratios in the industry. They´re confident that investors´ margins won´t slip and that they´ll easily maintain record levels of prosperity in the foreseeable future.

But pundits cite indicators that profit margins are eroding. They point to a number of factors that could impact their ability to maintain profitability. For example, as users replace traditional PCs with mobile devices, drive growth in hardware peripheral and software sales will slow.

The same reasons tech companies have struggled might also explain why markets get slammed when investors turn their backs on them. When one company closes a plant or buys a company elsewhere, it can resonate throughout the market.

Finally, there is the simple fact that tech companies´ future is hard to predict. Companies need to constantly come up with new innovative products to maintain and build customer and investor loyalty. But eventually, these businesses go´ stale´´ and half of those who lose their investor interest end up closing within a year.

But the Analysts Are Wrong

Reported Earnings Are a Choice

Not a Force.

This is the first thing you will hear at any stock market conference or from all the stock researchers present. A company's earnings reports are very important because they are the main factor in predicting stock prices.

Most companies report earnings on a quarterly basis, which is four times a year. There are three major forces that determine stock prices:

  • Individual Earnings Reports
  • Market Economics
  • Market Psychology

We Are the “Price Takers”

A stock trades on what is called a market, and there are a few markets you can invest in.

The primary market is where a company is issuing new shares for the first time, and it is where you’re likely to buy shares for the first time. When you buy into a primary market, you are part of the initial offering.

In the primary market, a company goes to an investment bank to sell its stock. This investment bank will then go out to potential investors (like you) and sell those shares. It’s the job of the investment bank to help determine the price at which you purchase those shares.

The price of the stock is called the “share price,” and it’s usually determined by looking at the company’s fundamentals like price-to-earnings ratio.

As an investor in a company, you’re what we call the “price taker.” You’re simply buying a share in a company, and you have no control over the stock price.