When a company needs to raise money they have two choices:
- Borrow money – bonds
- Sell a stake in the company by issuing stock
Believe it or not, when you own stock you actually own a part of the company. Although it may be a small portion of the company you still own it! It is THAT ownership structure that gives the stock value. You actually have a “claim” on the earnings that the company makes. The more money or profit that company makes each year the more value the investors place on that ownership.
As we know, stock prices go up and they go down. Some companies make more money than expected and others don’t make as much as expected. That is when you see a large move in the price of a stock. People make or lose a lot of money by telling investors which stock to buy or sell. This is what we call forecasting. Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed. The events that are being forecasted are the earnings of the company. How much will they make, or how much they will lose.
People have been forecasting events way before the stock markets existed. Our belief is that there is no way anyone can consistently or predictably forecast how any individual stock will perform in the future. What we DO know is that a group of stocks in a portfolio can actually decrease the volatility (ups and downs) inside of that portfolio, as long as it is done correctly. This is done by Asset Allocation and Diversification, which will be topics for another day. If you have questions regarding stocks and how your portfolio is structured feel free to email me at firstname.lastname@example.org.
Philip A. Guske