When you buy a company’s stock, you are investing in the future growth of the company. Yet, the stock’s price may float up or down based on some broad market or economic factors that may only indirectly effect the company.
For example, the possibility (not certainty) of increased inflation will send the overall market into a slump, especially if the Federal Reserve Board expresses its concern. That concern is seen as translating into higher interest rates to head off any rise in inflation before it gets started. Increased interest rates are bad news for most businesses.
Likewise, pronouncements that the economy is expected to grow at a robust rate is usually a bad sign for the market because it means they will probably be less inclined to cut interest rates – to avoid overheating the economy and fueling inflation.
The trick for investors is understanding which market-moving factors may also directly affect the company and its stock.
Major demographic changes may have a much more permanent effect on a company than temporary fluctuations in interest rates, for example. Aging baby boomers will create opportunities for some companies and problems for others. Knowing the difference will mean investment mistakes avoided.
How do you know what is a major problem or opportunity for a company you own or are considering buying?The answer is to do your homework Study the company, its products and markets. The company Web site (if it doesn’t have a Web site, there’s a big problem) and annual report.
While you won’t find proprietary marketing data in these public forums, you can get a sense of whether the management has a sense of what is important to the future growth of the company.
And it is the future growth of the company that will generate the earnings to benefit shareholders.