Investing in stocks is a gamble, that’s why individuals aren’t allowed to invest using credit cards. Just like gambling, many have lost their life savings investing, while some have become the world’s newest millionaires.
Losing all your money or becoming extremely wealthy are the exception, not the rule – but you can become the next winner in the stock market without making it your day job. How? Easy; there are certain occasions in a company’s lifecycle that make your bet almost as certain as the sun coming up in the morning.
The most important rule, and lesson in this article is in a safe bet, a stock price will only increase if its profits as a company increase. Plain and simple. No change in profit, no change in stock price. Lower profit, lower stock price.
When do most companies make more profit?
Companies make more profit when their revenues increase compared to their costs. This normally happens when a company is growing and attaining new customers, increase their sales, or reduce their costs. Companies have a point in their lifecycle known as the “growth period”. During this period, a company’s profits are increasing significantly as they enter new markets, or their current markets aren’t saturated and they had little to no profits in recent history (a startup). A great example of this is GM. Back in February 2012, GM posted “record sales”. In reality, their sales, compared to their rivals for the most part of a the last decade were nonexistent, so it didn’t take much to attain “record sales”. Anyway, as a result, their stock price went up 9% during trading in the same day. (Today their stock price is lower than what it was on that day as they struggle to compete in the market, again)
Once a company’s market becomes saturated, you will see their profits stabilize which will result in extremely slow growth, if any for their stock price. These are “safe bets” or long-term investments. Wal-Mart is a great example of this. Their profits have been slowly increasing over the past twenty years and investing in them is, at its worst, as good as investing in the bank, with a great opportunity to make some good money with enough patience.
When do companies announce how much profit they have made?
The financial year is divided into quarters. At the end of each quarter, all public companies, which are the ones traded on the stock market, are required by law to file their earnings. The four days a year that a company announces their earnings are often the most volatile days for the company all year.
But, there are two very important, and slightly confusing caveats. First, the expectations set by the S&P. The S&P is the body that sets ratings for governments and organizations based on forward-looking opinions about credit risk, MUST be beaten in order to see a jump in profit.
In layman’s terms, the S&P sets an expectation for each quarter, for each publicly traded company. If the company beats the S&P’s expectation, that’s where you make your money. For instance, if the S&P sets an earnings expectation of $0.05/share, and the company shows an earning of $0.10, you are going to make some good money.
The second caveat is the economy of the company from a macro level, and the current state of the economy as a whole. If a company beat expectations, but is stuck under a tremendous amount of debt or investors do not have enough confidence in the economy, you will not see much change in stock price, simply moderate gains or losses.
Key earnings announcements coming up:
— Thursday: Google Inc., Microsoft Corp., Advanced Micro Devices Inc., Verizon Communications Inc.
— July 24: Apple Inc., AT&T Inc., Netflix Inc.
— July 25: Zynga Inc.
— July 26: Facebook Inc., Sprint Nextel Corp., Amazon.com Inc.
— July 27: Samsung Electronics Co.
— Aug. 1: Comcast Corp.
— Aug. 2: Sony Corp., LinkedIn Corp.
— Aug. 15: Cisco Systems Inc.
— Aug. 21: Dell Inc.
— Aug. ?: Groupon
— Aug. 22: Hewlett-Packard Co.
— Sept. 27: Research in Motion Ltd.