Email Questions

[Stocktrading101]

This is an email I recieved the other day, and I am sure our community can provide some good feedback here. Thanks in advance. -Blain

"Hey Blain,

I just have a few quick questions to ask you:

People always tell me that when there is an anticipated increase in demand
for a specific company – that this anticipation will already be built into
the value of the share. I don’t understand how this happens. For example,
say Stock XYZ is going to report earnings, if there are 50 investors that
think Stock XYZ is going to go up, they will buy that company’s shares –
hoping they are correct on their assumption. This will increase the demand
for that stock – which should make the stock increase. However, how will
that anticipation be built into the share price? (do analysts predictions
have anything to do with it?)
Please let me know – as I have always wondered about this.

Also, besides financial statements, news about a company, its growth
potential, analysts expectations…what else affects the share price of a
certain company?

Thanks a lot for your help.
If it is more convenient for me to contact you with questions by another
means, just let me know.

Cheers,
Derek"

[Stocktrading101]

Looking for feedback on this question still, thank you in advance.

[gijoe9]

Originally Posted by Stocktrading101

This is an email I recieved the other day, and I am sure our community can provide some good feedback here. Thanks in advance. -Blain

"Hey Blain,

I just have a few quick questions to ask you:

People always tell me that when there is an anticipated increase in demand
for a specific company – that this anticipation will already be built into
the value of the share. I don’t understand how this happens. For example,
say Stock XYZ is going to report earnings, if there are 50 investors that
think Stock XYZ is going to go up, they will buy that company’s shares –
hoping they are correct on their assumption. This will increase the demand
for that stock – which should make the stock increase. However, how will
that anticipation be built into the share price? (do analysts predictions
have anything to do with it?)
Please let me know – as I have always wondered about this.

Also, besides financial statements, news about a company, its growth
potential, analysts expectations…what else affects the share price of a
certain company?

Thanks a lot for your help.
If it is more convenient for me to contact you with questions by another
means, just let me know.

Cheers,
Derek"

I am going to take a stab at this one. First of all the built into the share price part. If XYZ is about to release earnings the estimate will already be priced into the share price long before the actual earnings release. The demand will have gone up and the price with it. If the earnings are expected to beat estimate by a significant amount there may be a gap from one day to the next ergo the expected increase in earnings has driven the ask up over night. If the earnings release comes out after market close and does not meet the expectations of enough share owners then the price would gap down for the next open as people ran for the exits.
The second question: The other things that effect the share price are sentiment mostly. No body wanted tobacco companies for a period of years for a number of reasons not the least of which was sentiment the litigation was the biggest part of that.
Underestimating sentiment can be a disaster. Intel dropped a lot recently the first part of the drop can be related directly to earnings going down. If you look at the P/E you will notice that even with the earnings they are trading near a 5 yr low P/E the last $2.50 the shares dropped IMO was on sentiment. I feel that they could easily be trading around $21-22 a share but also on sentiment they could slide below $17. A similar thing has happened to MSFT they are trading in a range now for a while due to sentiment MSFT is now more like a utility than a growing company so people who might have been in MSFT for some time are heading for the exits and looking for bigger growth opportunities. At the same time different a type of investor is buying MSFT.
I am sure there are other things that can effect the price but most of those will just cause a change in sentiment. IE nothing can make investors sprint for the exits faster than accounting problems of a criminal nature Enron as an example. I hope that helps.
Joe

[toittoiger]

Could you please expand on the term sentiment?

[Stocktrading101]

Well explained Joe, I like that.

Sentiment is really the overall feeling of the situation. Dictionary.com says, "an attitude, thought, or judgment colored or prompted by feeling or emotion ".

EX: "The common sentiment attached to google right now is bullish"

Hope that helps man.