ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

How Investors and Traders Influence Stock Return

Updated on March 31, 2011

 

Any investment expert will say that past performance is no guarantee of future returns.  However, analyzing the changes of a company’s earnings, dividends, and the stock’s P/E ratio over time could reveal a trend that can give an idea of the potential returns to come. This approach is normally used by investors with a time horizon of 1 year or longer (Long-term investors), rather than traders who base their decisions mostly on price movement, chart patterns and momentum indexes.  However, traders do play a role in the P/E ratio that is used in this analysis.

Analysis of the Business Issuing the Stock (Fundamental Analysis)

On virtually any website that provides a stock quote, you’ll find the following 3 pieces of information in the snapshot summary: Earnings per Share (EPS), Dividends or Dividend Yield (%), and the all important P/E ratio.  These are the 3 measures that should be reviewed to see if there is a trend based on historic data.  If you are planning on investing for 1 year, then look at the company’s change in EPS, Dividend Yield, and P/E Ratio over the last year.  Add together the percentage changes for each one.  If it is negative then this stock likely won’t do well in the year to come.  Do the following for each stock you’re considering to see which has the highest percentage.  Also make sure to take note of how much of the total percentage is due to the change in P/E ratio vs. the changes in Earnings and Dividends.  The change in P/E ratio over the time period being analyzed will represent the change in investor expectation towards the stock.  The higher the P/E, the higher the expectations of future stock returns, and vice versa.  You have to be cautious about large changes in the P/E, it could mean that everyone is jumping on board and the stock/company might grow indefinitely, but on the other hand, it could mean that it will have short rapid growth and turn into a bubble.

Analysis of the Stock Price Movement (Technical Analysis)

If traders don’t look at any of the company’s statistics then what do they use to make their decisions? Traders use tools such as the Relative Strength Index (RSI), the Average Directional Index (ADX), and Stochastics to tell the short term direction of the market.  Traders may be buying because a stock price is coming off of a double bottom with strong momentum, not because the business is profitable.  Traders and market technicians (technical analysts) do not care about the company itself.  They also don’t care about EPS, Dividends or P/E ratios, but they do contribute to the increase and decrease of the P/E ratio. Even if they buy based off of chart patterns or indicators, they are still playing a part in increasing the price of the stock, thus increasing the P/E ratio (Assuming the shares outstanding and the earnings remain unchanged when the stock price increases). 

How Investors and Traders influence Returns

Investors and traders may have entirely different logic fueling their decisions, but the two cannot be mutually exclusive when determining what direction the market may be headed and why. Simply put, investors influence a stock’s return when they buy or sell it based on the underlying company’s reported earnings and dividend policy.  Traders use other tools, such as indexes, chart patterns, and volume to make decisions for buying and selling stocks, which is reflected in the P/E ratio.  Looking at the change in Earnings, Dividends, and P/E for a given period of time can give a sense of the overall market trend created by traders and investors who use both fundamental and technical analysis.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)