WHAT DO HIGHER corporate profits truly mean to investors? Or, put another way, this 77-year-old neophyte wants to know, “How is investing in stocks different from gambling?” Don’t get me wrong, I invest in stocks and I understand they’re the best way for most of us to grow wealthy over time. What I don’t get is, “Why? What causes a stock to increase in value?”
I’ve researched the question and what I find is a lot of talk about earnings per share, price-earnings ratios, earnings growth and such. But rather than answering my question, this stuff about earnings, valuations and so on leaves me even deeper in doubt.
One Sunday evening, I looked at the S&P 500 futures. They were up. But on Monday morning, the market tanked. What happened? Some news that had nothing to do with the value of any individual company, I suspect. I own shares in my old employer. It’s a utility that’s been around for 110 years and pays a decent dividend. The stock price bounces around from day to day and yet nothing significant at the company changes. For the current quarter, analyst estimates of earnings per share range from $0.31 to $1.04. Should I be concerned?
As long as the company pays its quarterly dividend—and continues to pay my pension—should I care about the latest quarterly earnings? I’m told earnings, or the anticipation of higher earnings, drive share prices. But if I don’t get paid my share of those higher earnings as dividends, why pay more for the stock? Somebody is gambling, I think, but I’m not sure on what—except perhaps on higher price-earnings ratios.
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