basic fundamentals quest?

Discussion in 'Educational Resources' started by vastox, Dec 31, 2007.

  1. vastox


    I’m sure the advanced traders in here figured out this basic question way early in their careers. Excuse my newbness.

    Correct me if I'm wrong but what is the connection between a company’s financial health and the behavior of its shares being traded? I don’t think there is one, but I don’t want to abandon this belief completely.

    What I don’t understand is when you watch the news and people are saying "Oil Company XYZ is getting new technology that can potentially etc., raising the stock’s price." It's then kind of like, who cares about what the company is or isn’t doing, we (the traders/market) determine the price whether we want to or not. Q1) So, essentially raising the question why care about the company’s financial health, instead study the markets participants, right? At the end of the day, we solely determine the price.

    The participants (MM’s, retail traders) trade shares depending on each’s views either for the short or long term - making the stock's price fluctuate. But, if this is true, then it's almost like all of us traders (the market) have all the power to single handedly control the shares price. We do, not the company? And I think we do. Q2) Then, who cares about the company's financial health: balance/cash flow sheets, EPS, any ratios, financial news, etc.? How and why does the company’s health determine the stock’s price? I don’t immediately see how it does.

    For example: Some company could develop new technology thus predicting greater revenue, but then whether it’s true or not, we the market have the power to still lower its share price (due to whatever forces) even though the company’s revenue will in fact go up. Q3) So, big deal their revenue does go up, but it still could be insignificant because we can choose not to reflect that extra revenue. Am I correct on this?

    Oh, Happy New 08'