Return on Investment Built on Expectations: Time Factor Is Critical in Stock Investing

Since all stock market buy-sell rush built on expectations, today's prices strongly depend on prices that even expected to be in several months. For example, if you are the first who know that today's $20 share would cost $30 in six months, you would rather to buy immediately. What can happen if others have the same prediction? They can do the same - buy immediately and that buying power can push prices higher very fast. Therefore, the price can jump in a few days due to a perspective of several months.

The chart below shows how short-term price behavior can depend on future expectation. Long-term forecast-1 was positive that pushed price up in short-term. Then when new negative information became available, the long term forecast-2 dragged the price down in short-term.




According to Efficient Markets approach, news and other public information are incorporated into the price of a stock with a certain time delay (price is supposed to reach and keep a stable equilibrium that change only each time a relevant new information is known). Since big money cannot flow very fast, individual investors have some advantage to react quickly. To do this efficiently it is important to watch informational resources, monitor companies' news and macroeconomic trends.

© Alex Shmatov. Published with permission of the copyright owner. Further reproduction strictly prohibited without permission.