Basics of investing in shares

[bvssrs]

Hi,
I am a IT professional, started some short term trading and lost 50% of my investment. I was guided step by step for doing this short term trading by a trading professional who has experience of 20 years in trading.

But now I began wondering how this investment climate works in NASDAQ/ AMEX/ any.

Let me explain my question considering an example.

Say a company A has following
Type of company: sOftware
Assets of company: office, furniture etc: $10mil
Location: Seatle
Revenue:$100million
Net Profit:$6mil
Company A too 10 years to achieve the above results.

Now it want to raise capital of $1Bil to expand it's operation in Minneapolis, Houston, Charlotte, and Boston and it went for an IPO.

Now as short term investors like me doesn't know how much to invest in this company will invest some money such that the total market capitalization of Company A is $1.5Bil considering both outside investors or long term investors and shot term traders.

So the company has a cash surplus of $.5Bil and they doesn't have neither respources nor plan for expanding further more.

Then comes 1st quarter results, and the company A with it's operations in Seattle will earn a profit of $2mil more than expected($1.5mil).

So again a short term trader like me will see this rosy picture and raised market capitalization of Company A to $1.7 Bil resulting in a cash surplus for company A to $0.7Bil.

Finally company A establishes it's branches in the four cities as planned and posts quarterly results after 1year 3months saying that incurred a loss because the business in as nascent stage in new cities.

Suddenly the share price falls and market capitalization decreases to $1.25B. Hence the market make at NASDAQ gains the value and the final investor looses money.

The point here is there is no real relation between company A's assets, revenue and profits to company A's share price.

It is simply that Google posted a profit in first quarter and market maker increases the price from $80 to $90 and still people seems to be buying it and he increases it to $100 and so on till today's $418.

Even though it's revenues($7.14B) and profit margin(33%) signify that it is no way related it's marlet capitalization $125B people still invest in that. Now what every happens with the share price happens with the pretext of Google's performance.

So is this share market a cheating where the market maker in NASDAQ/AMEX want to make money out of people's weekness for investing?

Am I laking any basics in here?

My simple understanding of share market is, company A wants to raise money for expansion. You invest in that. After 2-3 years of initial turnover, company A starts to reap benefits and you can get back your money + profits/loss posted.

I am sorry to write such a big one but I couldn't express this any smaller.

Thank you,
Siva

 

[Zeppelin]

WHat can I say... Pick a decent book about investing.
And my advice is: stay away from technology companies. There's too much volatility in the industry. And secondly: think long-term...

 

[megator]

My professor's favourite saying: value does not neccesarily equal price. It could take a long, long time for value and price to converge. So meanwhile you need to find a way to stay liquid enough to ride out the up and downs and irrationalities of the market.

So you are applying long-term investment analytical approach to a short term trading scheme. Not gonna work. Moreover chances that your trades are leveraged by borrowing on margin. That would only exarcebate any stock movement. With this strategy, to borrow a lingo from probability theory, your P(losing trade) = 1 a.s. (almost surely)



Edited 1 time(s). Last edit at Wednesday, May 3, 2006 at 12:01PM by megator.

 

[exemplaria]

"So again a short term trader like me will see this rosy picture and raised market capitalization of Company A to $1.7 Bil resulting in a cash surplus for company A to $0.7Bil. "

I think you have some a serious misunderstanding about how the market works. If GOOG's stock price goes from 600 to 700, and the market cap therefore goes from 50 Billion to 58.3 Billion (assuming the company is not issuing new shares), the company doesn't get the extra 8.3 Billion in cash to spend. If the market value falls, it's not the market makers who gain. Market makers try to maintain a neutral position, and gain from the bid-ask spread on a security.

Stock prices are a funny thing. They frequently (maybe usually) have little basis in any hard fact.

Chicago White Sox rule the AL Central.

 

[sydneybound]

the current price of a stock has to do with expectations of the future. you'll notice that goog's stock kept on going up as long as they kept on meeting or beating expectations. as soon as they showed some weakness, they got punished for it.

think about it this way. if i'm looking at the growth expectations of goog and i'm assuming annual growth in revenue and earnings (assuming margins remain static) of 20% 20% 20% 15% 15% 15% BUT then in year one they come out saying that they only expect first year growth to be 15%, then the rest of my assumptions (on which i've priced and bought goog) are out the window and i have to scale down. anyway, there's a ton more (obviously), but i would suggest picking up a How to Value a Stock 101 book.

'Frankly my dear, I don't give a damn.'

 

[JoeyDVivre]

BVSSRS - Great job, buddy. I don't know what happened to you that first time, but get back in the game. We miss you.