Often, retail investors ask themselves or people around them this question, “Why the share price of my stock will not go up?”. They will then feel frustrated figuring out why the share price will never go up even after holding for a long period of time. Due to this, investors tend to lose confidence in their stock holdings overtime and will never invest in the stock market again. What’s worse is that their shares plunged in price the moment they buy and they will start spreading their “unfortunate” experiences, complaining and telling people around them not to invest in the stock market.
“Stock market is just like a casino, nothing more but just gambling.”
We have heard these many times. Most of the investors participating in the stock market are like headless chickens; they always follow the crowd, always listen to friends’ tips, brokers’ advice and even taxi drivers’ advice in the stock market. Don’t misunderstand me, I am not saying they are wrong. Ultimately you must be the one responsible for your investment results because the money invested are yours, not theirs. Independent thinking is a must when it comes to investing. You must ask yourself how confident are you that the share price will go up in the future. Here in this article, I will share with you 3 common reasons that will cause the share price to go up.
1. STRONG MARKET SENTIMENT
Share price will go up when there is a strong market sentiment. Positive and encouraging news will boost confidence in the majority of the investors. For investors who invest based on market sentiment tend to study the behavior of the investors in the market. They will pay a lot of attention to analyst reports, market news and political news. Probably you have seen news or reports that sound like this, “Company A rises 3% on positive technical” or “ABC Research House said Company A may climb higher after posting a long white candle and leaving an upside gap”. These kinds of news will have an impact on market sentiment and might lead to an increase in share price. They are investors who specialized in this, and they are called traders. They are what we see in mainstream media, having more than 4 computer screens with complex charts, graphs and lines. They are using trading techniques like charts, indicators and candlesticks to study market emotions and speculate share price movements.
2. BUYING A GROWTH STORY
Share price will go up when there is another person who is willing to pay higher for the stock that you have. The rationale of their decision is based on the company’s growth story. There are companies which have been making losses year after year but still, they are investors who are willing to pay for these kinds of companies. Classic examples; Tesla INC, Uber Technologies, Snap INC and Lyft INC. These companies only have revenues but no earnings, cash burning and hoping one day to turn profitable. Cash burning company is very risky because when the cash runs out, the company will either raise funds from investors which dilutes its shareholders value or borrow money from banks, thus increasing the company’s liability. If it is at a cash burning stage and failed to get funding from investors or banks, it will collapse. Still, there are investors who are willing to pay for these companies that is to buy a growth story and hope the company will turn profitable someday.
3. EARNINGS GROWTH
Over the long term, the share price will grow when the earnings of the company grow. Investors who grow their wealth based on company’s earnings are called value investors. They assess how long it will take for the earnings of the company to match the price they pay. With that, they will know whether if the business is worth buying at its current price. They look for companies who have strong competitive advantage, which are profitable and has a healthy balance sheet to invest. When a company makes more profit over the years followed by increasing dividends, its business value will increase. Thus, it attracts more and more investors to have a piece of it causing more and more people to willingly pay higher for this valuable business. Value investors understand that share price movements do not give any useful information about the business. It only suggests whether the market is optimistic or pessimistic as it will move in all sorts of direction in the short term. But in the long term, the share price performance will be based on the earnings and cashflow of the business.
WHICH IS THE MOST RELIABLE?
You must understand stock market is just like any other markets; it’s a matter of supply and demand. When the demand is high, the price will increase and when the demand is low, the price will decrease. Like a fish market, certain fish have certain price and it will change depending on the supply and demand. So, which is the most reliable factor to dictate share price appreciation? Is it investing based on market sentiment, growth story or earnings of the company?
Well, it depends on which is your investment style, preference and perspective. Are you looking to buy a fish based on the fish market sentiment which is to buy a fish hoping that it is delicious and healthy eventually, or to properly assess the fish in display and only buy a fresh, nutrient rich and delicious fish?
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.