This is MoneyClub

Before you click that link, let’s consider what a stock (definition) price should mean to you. It ought to reflect the market’s present valuation of all future income discounted (i.e. taking into account interest rates and miscellaneous factors like the ‘equity premium’, the marketwide flat rate we apply to reflect the fact that shares in companies are inherently riskier than other instruments like bonds). That’s in an unrealistic situation of perfect information; to the extent that we function in a world of imperfect information and uncertainty, we assign probabilities to the financial performance of the company underlying the stock and, ‘A’-level style, compute the ‘expected’ income from the company (never forgetting to discount it of course) and this should be the total market capitalization (definition) of the company. Divide that by number of shares outstanding (definition), and you have a rough idea of what one share ought to be worth.

Many things happen on the day that a company announces its earnings (or profit, to economists); an earnings increase, all things being equal, should greatly improve investor sentiment regarding the long run profitability of the business, and vice versa.

How unequal can all things be? Imagine jubilantly announcing that profits have fallen by 57% to a shellshocked crowd who have put their life’s savings with you (ok I exaggerate). What do you think they’ll do?

Featured Case: Hanes Brands

Thanks for stopping by MoneyClub; remember you can always join our mailing list to discuss any of the topics you see here!