Personal Finance & Money Asked by H. Idden on January 29, 2021
It seems a common canon, that when you get to know information about the future of something at the stock market, that the price at the stock market already has this information calculated in. For example if it is expected that the next quarter a company will sell less and therefore be worth less, the price has already gone down, and if good sales for the next quarter are expected the price has already gone up because professional traders react faster (because of having more time to follow the news of the companies and better news sources, better analyzing tools, …).
Also for example for bonds the price per coupon seems to be original price + remaining dividends – likelihood/risk of non-payment for example because of bankruptcy.
Simplified there is 50% chance expected that the value after the quarter announcement is $90 and a 50% chance the value after the announcement is $110, so the value before is $100. So you buy it at $100 and hope you are lucky and it will be worth $110. If you are unlucky you lost $10 per share. On average it will be $100.
So to me it seems that for a non-professional it is just a gamble with an average 0 payout (before fees). Still many people seem to use it, for example for increasing money or in the USA for pension because of the missing pension system in the USA.
Are those just speculators or what am I missing in my conclusions/where am I wrong/how does the non-professional person beat the predictions of the professionals?
(I hope I didn’t hurt anyone by the use of some terms because English is not my native language and I am not that familiar in this area)
To clarify:
I am asking for investing/holding a position for longer terms like at least multiple months/years, not day-trading.
Even if a non-professional doesn’t compete with professionals/doesn’t want beat them they influence it so they can only buy it at a price that already includes expected future gains if I understand it correctly. But still people seem to make money with it. This is what I don’t get.
Please keep in mind that I am a beginner and have a beginner flaw in my thinking or not familiar with all effects/consequences in the market.
If everything is known about the market and is priced in, then why does price subsequently change? Why do many professionals traders, money managers, institutions, investment bank trading desks, et al occasionally lose a lot of money (see 2000, 2008, March 2020 and many other time periods)? My two cents is that not only is everything not known but not everyone utilizes the known information the same way.
Take your example that if "good sales for the next quarter are expected (then) the price has already gone up because professional traders react faster." If that was the case, then why do some stocks fall or rise 10, 20, or more points when the earnings announcement is made? If they knew the answer before the EA then there should have been no surprise after the EA.
I'm a bit confused as to what you're after. In one paragraph you're talking about quarterly information and in another, non-professional traders. Investing or trading? Either way, I don't have a simple one size fits all answer for you. You don't have to beat the professionals. All you have to do is consistently much better than money market or CD rates and you're a winner.
Answered by Bob Baerker on January 29, 2021
The way you compete against the professionals is...you don't compete.
Pick a couple of indexes, pick how you want to distribute your investments using stock or bonds funds that follow those indexes. Put the money in every payday, and then re-balance every year or two.
Don't try to read the market, don't try and time the market, don't try to guess what will be hot next quarter.
Answered by mhoran_psprep on January 29, 2021
Future gains are priced in, but they're priced in at a very high discount rate due to the risk that stocks present.
Consider, say, a bond which will pay exactly $1,000 when it expires 6 months from now. Suppose that some company wants to sell it. Will it ask $1,000 for it? No, it'll ask something like $999, because it would rather have $999 now than $1,000 6 months from now.
We may say that the company is selling the bond at a discount rate of 0.2%, since that's the amount of annual growth you could get by repeatedly making investments that are identical to this bond.
Now imagine a stock. Analysts believe that 1 year from now, the stock will have a 50% chance of being worth $200 and a 50% chance of being worth nothing. Now suppose that some company has some of that stock and wants to sell it. Will it ask $100 for it? No, it will ask something like $90, because it would rather have a certain $90 right now than a 50% chance of $200 in a year.
Now we say that the discount rate is about 10%, because that's the amount of annual growth you could get by repeatedly making investments in a variety of stocks that are identical to this one.
Anyway, individual investors like me are happy to take them up on their offer. I'd much rather have a 50% chance of $200 in a year, than a certain $90 right now.
Answered by Tanner Swett on January 29, 2021
Simplified there is 50% chance expected that the value after the quarter announcement is 90$ and a 50% chance the value after the announcement is 110$, so the value before is 100$. So you buy it at 100$ and hope you are lucky and it will be worth 110$. If you are unlucky you lost 10$ per share. On average it will be 100$.
This is incorrect assumption. It's generally not 50%. Say the price is 100, market believes that the quarter would be good and company may make x profits, y sales, etc, all of this gets factored in the current price goes up to say 110.
When the results are announced, if it doesn't make the expectations, the price goes down depends on how off could be 105, 100 or even 90 ... However if the company does well than expectations, it goes up may be 115 or 120
It's a continuous evaluation of expectations vs actual.
Answered by Dheer on January 29, 2021
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