Are stocks a good indicator of a company's future?

Asked by: the-entp
  • Stocks depict what investors believe

    Stocks paint a good picture of what investors' belief that a company's future will be. Most investors do not randomly invest in different companies. They do research on a company's price:earnings ratio, management, etc. If stock prices have been increasing in the past few years, then the company's future is not grave. Plus, with increased stock prices, the company has more money to expend on innovation.

  • What investors believe is based on imperfect knowledge and often more based on following the herd or looking at charts.

    Many investors choose to diversify their share portfolio to reduce the effect of any one poor investment decision. The stock price is what the market considers to be a fair price between buyers and sellers. But is the stock price a good indicator this depends on your definition of good. It is better than reading tealeaves but plenty of people lost a lot of money in the GFC.

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