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Answer to Question #47512 in Microeconomics for lilly

Question #47512
Suppose that the stock market operates according to the principles of supply and demand and that there is a widespread expectation that a particular stock’s price will fall in the future. While we can be sure that the current stock price will fall, we cannot predict whether more or less or the stock will be traded.
Expert's answer
Investors who profit the most from penny stocks generally have a solid understanding of a company’s expectations and actual results and know how the two relate to each other.
The shares of most larger companies are based primarily on results, with only a small amount of their value coming from expectations. Penny stock markets, on the other hand, react more to expectations than results. Investors familiar with larger markets but new to penny stocks are often surprised when a penny stock that has just reported a doubling of its sales doesn’t see an increase in its share price.
Expectations are more important in penny stocks than in larger companies for the following reasons:
-The fog of war. Penny stocks have fewer analysts following them, and the companies issue guidance much less frequently. This lack of information leaves a lot more mystery surrounding the potential financial results, and so when the actual numbers come to light, there can sometimes be a major reality check for investors.
-One-trick ponies. Penny stocks usually have very few business lines or products and very often they have only one. When expectations for sales, or customer adoption and retention, don’t match up with actual results, that disconnect will have significant implications on the viability and acceptance of the company’s product or service. When investors realize that everyone is buying, or that no one is, the share prices will immediately react.
-Speculation has more uncertainty. Penny stocks are traded more on speculation than results — on what a company could do compared to what it has done. You could say that investors rely more on hope than quantifiable results. Speculation by its nature gives penny stocks wider price spreads, and there is often a lot more room for correction when those expectations are compared with a company’s real results.
-These companies are babies. Penny stocks usually inhabit an early phase of their corporate life cycle. Many of these penny stocks don’t have revenues, earnings, or even a history of results for comparisons or to gauge growth against. The price of these shares may be based entirely on expectation, and whether the shares do well may be based primarily on changes in forward-looking speculation.

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