Introduction to the Stock Market and Investing
WHY STOCK PRICES GO UP The movement of a stock index such as the S&P 500 or an individual stock depends on two things: Earnings per share (EPS) and changes in EPS. Stock price/earnings per share ratio (PE ratio) and changes in the PE ratio. If the PE ratio stays the same, an increase in EPS leads to an increase in the stock price. The same is true of a stock index. Rising EPS combined with a rising PE ratio is often the reason why a stock goes up more than the average stock. Well, that was easy. Well, not really. The stock market is “forward-looking,” that is, it tries to anticipate changes, especially changes in EPS and the PE ratio. There is a great amount of forecasting. But since the forecasted changes are in the future, they are inherently uncertain. The forecasts of some companies’ EPS are more uncertain than others. Some are very uncertain. For example, the future sales and earnings of a small biotech company may depend on the ...