Economic Fundamentals Importance

Many financial experts used to advice that it is always better to purchase stocks when a bad news has been released and sell the stocks when good news has been issued.

This advice holds some degree of truth, especially for day traders, who execute transactions over the short-term. The logic behind it is that bad news drive prices down and this is the right time to find some real bargains. On the other hand, good news increases the stock's price and lead to greater profits.

However, things have changed.

The stock market implements its efficiency and corrects the prices once the news has been absorbed. More importance is given to inflation, earnings and other factors that have a direct influence on the stock's price.

As an example you may consider the events surrounding the terrorist attacks and the hurricane disasters. Since then the oil prices have experienced tremendous increase.

As a result of these events, the stock market experienced sharp changes. However, the conditions were quickly corrected by the end of the week to experience its gains.

The expectations of many stock market watchers have not been met, since most of them predicted a deep depression. However, just the opposite happened and the market quickly restored its balance.

Generally, the trend the stock market follows is one of forward growth. Oil prices turned out to be a factor of less importance in earnings, than the expected for the upcoming earnings season.

However oil prices, as well as the housing boom, may still result in a decline in the stock market. Their impact may result in higher inflation rates, which can cause a down market.

The moral of the story is that you should concentrate on studying such fundamentals that may have a long-term impact on the performance of the stock market. When establishing your investment portfolio you should design it to meet both your risk tolerance and the time horizon you have for investing. If you are nearing retirement or you expect that you will need money soon, your investing style should be more conservative. Avoid practicing day trading, because many cases show that this is a losing strategy.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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