When you wish to set up investment incomes to stream into your retirement portfolio, you must understand that institutional money is constantly bargaining over stock prices, lowering and raising them.
All market participants act on the information available to them. This can include non-stock related information, such as the need to raise cash or the need to buy the stock because it's included in a particular index.
Both Bulls and Bears Have the Same Information
However, it's generally assumed that most participants buy a stock because they expect its price to go up, and sell it because they expect its price to go down.
Although, being human, their analyses can be different, it should be based on the same basic company information, news and financial figures. All institutions have access to huge amounts of historical and current data. Increasingly, so do ordinary investors.
Yet Bulls and Bears Arrive at Opposite Conclusions
However, for every buyer there is a seller. Therefore, two people can have access to the same information and yet arrive at diametrically opposed opinions.
Their Convictions Cost Them Cash Out of Their Pockets
However, they may differ in the strength of their convictions, and this then affects the price at which they arrive at agreement.
If the buyer is stronger in their conviction, they'll be willing to pay a higher price. If the seller is stronger in their conviction, they'll be willing to sell at a lower price.
It's a bargaining process, so the one who thinks they have the most to lose from the transaction not taking place is the one who gives in during the bargaining over price.
The Current Market Price Reflects All Known Information to All Market Participants
Therefore, you have to assume that all known information regarding a company, its financial condition, its business prospects, its industry and the economy as a whole is included in its current market price.
That's not literally true, but it's true for all practical purposes.
Of course, not everybody who ever buys stocks has all this information at their fingertips. People who buy stocks sporadically, who research them part time at home, can't have a complete, in-depth look at all the thousands of stocks in the marketplace. However, if they're not willing or able to put their money (or stocks they already own) on the line, they're simply not a market factor.
And these days many institutions -- hedge funds, mutual funds, pension funds, life insurance companies and charitable or other nonprofit trusts -- do have a vast array of computers, databases, real time price information, coupled with proprietary trading software and the expertise of Ph.Ds in Math and Finance on a continuous watch for bargains in the marketplace.
Future Events Change Bullish and Bearish Expectations
However, nobody can foretell the future.
Companies come out with new earnings numbers, new products, new CEOs, new problems, new lawsuits, and so on.
Therefore, after announcing an unexpected increase in earnings, a company's price will typically go up. That's because now investors know the company is making more money than they realized.
Or, if their earnings unexpectedly go down, the stock price will go down because investors now know the company is making less money than they realized.
Much of the News Means Nothing to Long-Term Investors
Much of the information seems nit picky to ordinary, long term investors. If next quarter's earnings go up or down a penny, will that still be significant in twenty years? If you bought Coca-Cola in 1954 and still own it, do you still care about some quarter in 1979 when it didn't meet analyst earnings expectations? Of course not.
There are Exceptions
However, some news may be important. A major anti-trust lawsuit by the government could affect the company's long term existence.
A new product line may help it go from industry newbie to established industry leader.
However, Most News Causes Short-Term Fluctuations Only
However, these outcomes also cannot be predicted. And this kind of fundamentally important news with potential long-term repercussions is relatively rare.
Most financial "news" is statistical noise that matters nothing in the long run.
If you wish investment incomes, you should realize you can't keep up with market price fluctuations, and even if you knew all the news, you can't predict its ultimate impact -- until the future arrives, and then it's too late.
Author Resource:
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