When looking at a particular share there are many factors to take into consideration which include the fundamentals, research, general market and prospects for the future. These factors should be researched in great detail but at the end of the day the stock market will have the loudest voice. What do we mean by that?
Dissemination of information
A stock market is simply a vehicle for the dissemination of information which basically means all factors and views are taken into consideration and a natural share price will emerge. This will not be based on the fundamentals, company research or market performance but instead it will be a mixture of everything. There will be times when certain factors are stronger than others, having a greater impact upon the share price, but eventually the market will find a level.
Positive spin
There are very few investors who have never fallen into the trap of believing the constant positive spin some companies tend to release. There are occasions where the share price is doing the exact opposite to the positive spin put on the company’s prospects and performance. Do you believe the market or do you believe the company?
The simple fact is that stock markets have no bias for or against any individual shares but can the same be said of company directors and key shareholders? That is not to say all company announcements should be taken with a pinch of salt but if the share price is saying one thing, and the company saying another, this should sound warning bells.
Don’t fight the market
While it would be wrong to suggest that stock markets “get it right” with every company and every share price valuation, there are very few situations where markets are proven wrong. When you let emotion play any role in your investment decisions this can be the start of the end. Do not look at any company with affection or disdain, do not create a “soft spot” for a particular company or sector, look at everything in isolation and refrain from letting your heart rule your head.
It is only then that you can begin to appreciate what the markets are telling you and what previously you may have been trying to ignore. Any investor who says they have listened to the market on every occasion it “spoke to them” is perhaps being a little economical with the truth. You will learn that the market knows best, you will learn to appreciate share price performance and company announcements in isolation and ultimately understand that the stock market is really just a vehicle for the dissemination of information.
Summary
When investing in stocks and shares we are quite literally at the beck and call of the market. This is a market which takes into account public information and very often inside information which can impact share prices “under cover of darkness”. How many times have you seen a spectacular share price movement ahead of a major announcement? How many takeovers and mergers are kept under wraps before the deal was announced?
Rightly or wrongly stock markets do take account of both public and inside information which tends to seep out from a variety of different parties. So, when a company is giving a positive spin on its prospects, but the share price is telling a different story, do not discount what the market is telling you. Something is wrong, something is amiss and it could have a serious impact upon your wealth.