3 Things You May Not Know About The Stock Market
The number one thing most investors don't understand about the stock market is that the value of common stocks is heavily dependent on the level of short-term interest rates. Whenever investors can earn a very high rate of return on short-term, low-risk investments, they will not place their money at risk in the stock market and thus the overall price level for stocks will fall.
The second thing many investors don't understand about stocks is that the nominal price of a stock has absolutely nothing to do with its intrinsic value. Which is to say that if you understand this fact, then you would know why it is that a stock which trades at $10 per share can actually be more expensive than a stock that trades at $100. In order to get a rough idea of whether a stock is cheap or expensive, you must look to its income statement and also to its balance sheet relative to the total value of its shares outstanding.
The third thing most investors don't understand is that the popular indexes are actually a very poor measure of the overall health of the market. The S&P 500 and the NASDAQ are both "market cap weighted," which means that the prices of larger stocks like GE, Intel, and Microsoft tend to move the indexes far more than do dozens of other companies combined. The Dow Jones Industrial Average is distorted even more strangely because it is price-weighted, which means that stocks with high nominal prices will influence that index proportionally more than other stocks.
If you really want to know whether the general trend is higher or lower overall, you have to look at either the advance/decline line or an index that weighs each stock equally, like the Value-Line Index. (NOTE: You can find the Value-Line Index on Yahoo under the ticker: ^VLIC.)
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The second thing many investors don't understand about stocks is that the nominal price of a stock has absolutely nothing to do with its intrinsic value. Which is to say that if you understand this fact, then you would know why it is that a stock which trades at $10 per share can actually be more expensive than a stock that trades at $100. In order to get a rough idea of whether a stock is cheap or expensive, you must look to its income statement and also to its balance sheet relative to the total value of its shares outstanding.
The third thing most investors don't understand is that the popular indexes are actually a very poor measure of the overall health of the market. The S&P 500 and the NASDAQ are both "market cap weighted," which means that the prices of larger stocks like GE, Intel, and Microsoft tend to move the indexes far more than do dozens of other companies combined. The Dow Jones Industrial Average is distorted even more strangely because it is price-weighted, which means that stocks with high nominal prices will influence that index proportionally more than other stocks.
If you really want to know whether the general trend is higher or lower overall, you have to look at either the advance/decline line or an index that weighs each stock equally, like the Value-Line Index. (NOTE: You can find the Value-Line Index on Yahoo under the ticker: ^VLIC.)
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posted by Bob Moser at
9:06 AM
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