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The Financial NewsRight now we are going to focus on building an understanding of some of the things you may typically hear in the financial news. We also will show you how to seperate what actually matters and what is nothing more than jibberish. Stock Index A stock index is nothing more than a grouping or a composite of a number of different stocks, often with different characteristics. Stock indexes are typically used to discuss the overall performance of the stock market, in terms of changes in the market prices of the stocks as well as the trading activity there is in a particular period. Three of the most widely watched indexes are: Dow Jones Industrial Average, S&P 500, and the Nasdaq Composite. The Dow Jones Industrial Average is composed of 30 large cap stocks from a variety of indusries. The S&P 500 is composed of 500 large cap stocks. The Nasdaq Composite is composed of 3,000 stocks that are listed on the technology heavy Nasdaq Exchange. Noise Versus News Anyone can keep up with current business events. Walk into any newsstand and you will see many magazines dedicated to business. There are several cable T.V. channels devoted to business. The Internet offers countless websites about business and investing. Oftentimes news cause stock prices to move up or down dramatically. Most times the markets' reaction to the news is warranted and other times it is not. The challenge for investors is to recognize what is real and what is fake. The investor must determine what is relevent news to his investments. We believe in the long term investment strategy. We think investors should scout out great companies with competitive advantages and can create shareholder value for the foreseeable future. Then wait until the their stock becomes cheap before investing in them for the long term. An investor should keep a watchful eye on his investments. Ask yourself these questions about any news you hear about your investmen: "Does this news affect the long term competitive advantage of this company and its cash flow?" Does it change this companies long term investing prospect." This is key to understanding the investment process. Occasionally news will break that does not affect a company's long term competitive advantage or its investing prospects, but the price of the stock will fall anyway. This is a buying oppurtunity. Negative Earnings Suprise Wall Street is full of professionals whose job is to analyze companies and provide opinions about them and their future financial results. These are very intelligent people and have a wealth of information and experience. The problem with these people is they tend to be very near sighted. They just have estimates for the next three months or quarter. If a company's earnings fall short of analyst quarterly estimates, then the share price might fall. This is called a negative earnings suprise. Conversely, if the company beats earnings expectations, the share price might rise. Let's say Coke missed earning esimates by five cents a share and thestock price fell. Just because Coke made five cents less than expected does that mean Coke will not be the number one selling soft drink in the world. Coke will still have its long term competitive advantage. Falling a few cents short of earnings estimates in one quarter is not a big deal. Don't sweat it. Sometimes these same analyst give an upgrade or a downgrade on a company's stock. Sometimes this may cause the stock to move up or down depending on the analyst opinion. Just because an analyst gives an opinion about a company does not change the value of the company. Over the long term a company will survive because of its ability to make money, not because a peson gives an opinion. It does not mean the analyst is right or wrong. It is up to you to do your homework and dedide on your best course of action. Newsworthy Events Sometimes investors will hear news that have them running for cover and rightfully so. One such event is the annoucement of a regulatory investigation by the Securities and Exchange Commission or the Department of Justice. Another event would be serious litigation. Lawsuits often attract other lawsuits. So be very careful. When you hear these newsworthy events, it is time for you to do a lot of homework and find out what is really going on. The Financial Reality Investing will reqire you to keep a steady hand. Your patience and will power will be tested often as stock prices react to news,some justifiable and some not. Just remember that every bump in the road is not falling off a cliff. If you sell everytime you hear bad news, you will find yourself selling at the worst times. But by using focused discipline in separating the news that does matter from the noise that doesn't you will emerge with satifactory results.
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