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I am extremely excited to announce my new e-book,
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10/1/06 Diversity in a single stock Last week I touched on the advantage to having a diversified portfolio. A point was also made that a single stock’s price can be impacted by many factors, depending on the business. The example of a hotel chain was given, but this can and does apply to many different stocks. How does the price of a stock get determined and what makes the price move about? That is a million dollar question, and if I had the definitive answer I would be winning a Nobel Prize for economic modeling or some such award. I will give a short answer to the question, and we’ll move forward from there. Many factors influence the price of a stock, not the least of which is the buying public’s opinion of a stock. There are many stocks that have prices that are in no way a reflection of the absolute value of the stock. Examples of this (which I have used before) are the dot com stocks available. What makes people pay top dollar for a stock that is from a company that is not making any money and has no near future valuation? –Sentiment, or “gut feeling”- People will buy speculating that sometime in the near future a stock will burst out and a service or product will be in high demand. This is also apparent in the biogenetic area. New biotech companies are sprouting up all the time and a large percentage of them never amount to anything. Research is being done and potential products/services are being investigated. People buy on the chance that a company will bring a viable product to the market and the stock will skyrocket. It has happened in the past and will happen again, but the odds of finding the right biotech, or micro-tech company, among the hundreds or thousands out there, is not high. So, how do you decide where to invest? You need to look at the ‘big picture.’ Evaluate the multiple factors that makeup the value of the stock. Some of those factors really have nothing to do with the product or services provided. As I stated last week, the majority of value of some stocks is the real estate, buildings, equipment, etc. The product itself and inventory can be considered an asset, but actually that also is a liability because inventory is tying up capital. A company doesn’t make money on inventory, so the real value is in turning over inventory. If a company manufactures a product, they want that product off the shelves and new product constantly being made. SO… how does all that affect the price? Sales. Looking at a company’s sales and profit from those sales tells a tale that really should be reflected in the price. Percentage of return to the stockholders, return on assets, and whether a company is growing through expansion of the primary business, or by purchasing related (or unrelated) companies. There is much that impacts stock price and when you buy stock, you should research it as much as possible and try to determine real value.
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Want a scholarship into the Millionaire Mind Intensive worth $2590? http://www.secretsofthemillionairemind.com The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy copyright Robert E. Britt 2006 |
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