PRICE IS BAKED INTO THE VALUE-DON’T BE FOOLED!
Novice investors often make a big mistake. They see something or come across a product or service they like, so they buy a stock in it. Other times, it’s because a friend or a colleague highly recommended it. An example of this would be I like coffee from “Starbucks”, so I’ll buy their stock. All my friends use “Facebook”, so I’ll buy their stock. I found my spouse from “match.com” and she is so awesome, so let me invest in their stock. President Trump tweets a lot so “X” stock must go up!
The problem with this thinking is that a company can have billions of outstanding shares. Millions of people have invested in those companies at different prices. Thousands of people knew about this stock before you. Do you know thousands more have invested in these securities way before you had their product or used their services? Most of how great that stock is, may have already been baked into the price! A lot of the time (not always) you are late to the game! Accept that stock doesn’t have to perform just because you now believe it’s great a stock. Market doesn’t care when you start to realize a bargain.
Now, if you know something that an average person doesn’t know I.e. If it’s a startup company that you see growing locally with very little coverage. A company that is expanding and you see it within your industry of expertise, etc. Keep in mind, most companies you find online have already been founded by others. You may simply be late to the game.
This is what it means to say the price is baked into the stock. Everyone wants to get in on the ground, to maximize their gain. Investors start to predict and buy on rumors. This could be way before YOU realize it’s a great company and buy their stock. Now sometimes you are lucky enough to see what others don’t and get in early. Sports analogy would be like an athlete signing a contract based on his/her potential and not performance. Lebron James and Kobe Bryant signed million dollar deals coming out of high school without ever playing a single game in the NBA! It was their potential, not how well they have played in NBA. Similarly, investors react to potential gain. By the time the event happens, the stock price has already reacted. The stock doesn’t care that you have now entered the market. Actually, it never really cared when you enter the market. Unless you are going be buying in millions, affecting the share price.
As you get better, you will be able to predict and buy stocks based on its potential. You might see its value before others. But, for starters, stick to the actual numbers. Just understand that if you like a company’s product or their service, add it to your radar. You will need to do more research before you buy by analyzing their numbers.
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