For anyone interested in accumulating wealth through stock investment, they can learn and be inspired by those who made it before, such as Warren Buffet. According to Forbes magazine, up until January 2022, Warren Buffett accumulated a net worth of 109.5 billion USD through careful investing using mathematics to guide his investment decisions, making him the 9th wealthiest individual globally in 2021.
Warren Buffett, who was considered to be most wealthy person in the world in 2008, in his typical approach to investing, was to buy a cash-generating company and then compound that firm’s financial assets at annual rates reaching between 20 percent to 30 percent, with the proceeds going into his investment firm, Berkshire Hathaway. His career has been based on exploiting the world’s financial inefficiencies, increasingly compounding his income.
To get more knowledge about the financial sector, in 1947, Buffett went to college at the Wharton School of Business at the University of Pennsylvania and finished his degree at the University of Nebraska. In his second year there, he was strongly influenced by investor manager Benjamin Graham, a Columbia University instructor who wrote the book The Intelligent Investor.
Buffett went to graduate school at Columbia and received a master’s degree in economics. Graham’s ideology, which is still relevant today, is that stocks should reflect a company’s inner worth and that superior returns could be gained by buying undervalued securities. That principle became Buffett’s ideology, and should guide any investor interested in financial management and investing in stocks.
Despite having a strong education and financial background, Buffet continues to read financial books. By introducing Warren Buffet’s background in financial education, we aim to enlighten our readers about the importance of financial knowledge in making successful investments.
One of the factors influencing stock prices is economic uncertainty. While known factors are already reflected in efficient market prices, the main sources of market instability are unknown factors. And here, let us be clear that these unknown factors shall not be referred to as market risk but rather as market uncertainty. Efficient market prices can be considered as correct only in reference to a set of known factors. Therefore, from the perspective of market stability, the most important aspect is not market risk but the degree of market uncertainty embedded in different assets or business models.
Some of the factors affecting share prices can be generalized to both developed and developing economies. It is true that company fundamentals, such as institutional factors and the nature of the firm or business, are major factors that affect stock prices.
However, a firm’s boundaries, organization, governance, ownership pattern, auditing, and value relevance of accounting information are the most influencing factors in stock prices too. This leads us to emphasize that a qualified management team is essential to any company’s profits.
During times of uncertainty, the prices of assets usually drop; therefore, as an intelligent investor, you must take advantage of lower prices to enter into the market or buy stocks.
Since the price of a stock can rise or fall, the majority of investors would rather buy it or sell their stocks. And no one can predict with any certainty what might cause the price to decline. Put simply, if more investors want to sell their stocks in the fear that stock prices may decrease, then they will be willing to sell their stocks at a lower prices; hence, these huge selling of stocks will automatically trigger the price to decline. Likewise, if more people believe, for whatever reason, that the price is going to rise, they will then buy stock, which will cause the stock prices to increase.
The stock price of a company is sensitive to several events, such as company news, financial results, political stability, etc. Even global or country-specific economic situations impact stock prices too. In the following section, we have mentioned some of the factors that impact a company’s share price.
Government stability
Domestic economic fundamentals play a major role in share prices. Share market prices have a direct bearing on the way a government is performing. When people have faith in the government and the government has successfully contributed to the economic welfare of the country through effective reforms and good policies, the share markets in this country are bound to reflect the prosperity.
Industry production index
It is the overall view of industrial growth, as indicated by Industry Production Index data, that market prices can be expected to increase. However, since the performance of international markets can have a positive or negative effect, weak Industry Production Index data from another country can also bring down stock prices.
Change in budget
The budget presentation of a country can send financial markets into uncertainty, as we have seen time and again.
Economic condition
Whether a recession or economic prosperity, these two extreme situations will affect stock prices when the markets react to nationwide panic or exhilaration, such as the market crash during the financial crisis of 2008 and the COVID-19 pandemic in 2020.
Rating upgrade or downgrade
Similarly, for instance, when credit rating institutions, such as S&P, upgrade a country’s credit rating from negative to stable, that country’s stock markets go up and the opposite happens when a country is downgraded.
If the global and country economic outlook are positive and the economy is expanding, markets goes up, thereby increasing the price of stocks. However, if a particular company is not performing well but the country’s credit rating is positive, investors will still buy more stocks in the expectation that companies will generate more profits, and thus, higher stock prices.
Performance of the global markets
International news affects international stock prices either positively or negatively. Since there is a certain amount of correlation between world-wide stock indexes, in most cases, stock prices also react when another stock index behaves in a certain way.
Inflation
Inflation data is the deciding factor for the road map for future interest rates and has a direct impact on economic growth. And as mentioned earlier, stock markets are the biggest economic reflectors.
Gold prices
It has been observed in share marketing that the rise in gold prices is a sign of a bearish market as it shows that people are fearful and reluctant to save their funds in relatively unsafe investment options like stocks, and vice versa.
Volatility in fuel prices
Fuel prices are directly proportional to inflation. Hence, a fall or a rise in fuel prices is closely monitored by market participants and investors alike. Also, modern industry relies heavily on transportation to deliver raw materials to factories and to deliver finished products to customers. The price of oil as used in transportation has an effect on the end price of virtually every physical product that has to be moved from point to another. In many cases, this includes transportation across oceans.
Gross domestic product (GDP)
Gross domestic product (GDP) indicates the growth and performance of a country. A good GDP report can bring in a new lease of life into markets.
Quarterly earnings
The quarterly results of a company have a considerable impact on its stock price. At the center of this is Earnings Per Share (EPS), what kind of earnings per share growth a company has shown already, what kind of growth any analysts following them expect them to report in the future, and what kind of track record the company has with missing, meeting, or beating analysts’ estimates. Most investors consider investing in a company that has increasingly high records of earnings per share growth. And the earnings per share become one of the measurement of picking stocks by investors.
Demand in the market
Stock price goes up when bidders keep bidding for higher prices until no one wants to bid anymore and the only price that remains is the offer, with no higher bids being made. The last bidder can continue bidding at the same levels and not bid higher than the current offer, resulting in price moving sideways at the higher levels. And the opposite happens when there are no active bidders, the stock prices will decline.
However, investors must be cautious when observing a situation in which the demand can often be controlled by traders who intentionally create artificial supply and demand. Artificial supply is created by selling stocks you don’t own, and then increasing demand by buying back to pay back borrowed shares. Traders can also sell using one account and buying back through another account, thus creating artificial volume and volatility. All of these are part of a strategy to trick less experienced amateur investors into panic mode and approach unprofitable moves, such as selling low to stop loss and buying high to chase momentum.
One view is that the stock is worth whatever it will pay in dividends from now until eternity, discounted to present value. That being said, the following list includes some of the factors, in no particular order, that can cause buyers and sellers to think a stock is more valuable:
1. Dividends: A stock that pays a high dividend, or a stock that has a history of raising its dividend regularly.
2. Law of demand and supply: If a stock has demand, then the price will increase. But if there is no demand, then the price will reduce. As demand increases, supply decreases, and vice versa. The price fluctuation also depends on environmental conditions. If there are any natural calamities or sudden disasters, then the price will fluctuate. If there is any change in economic policy, then the price will change. It may either rise or reduce, ad it also depends on company performance. If the company performs well, then people will want to invest in that company’s stock.
3. Deflation will also lead to price fluctuation. If the currency loses its value, then the stock will also lose its value.
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