Understanding the Stock Market

Or not.  According to InvestorGuide.com,

Citigroup (C: Charts, News, Offers) posted a big first-quarter loss on billions of dollars more in writedowns and announced thousands of planned layoffs, but shares rose as the damage did not appear as bad as some feared. The loss for the period was $5.1 billion, or $1.02 a share, including $12 billion in pretax writedowns and a $3.1 billion increase in credit costs in the global consumer business. Revenue dropped by half to $13 billion in the quarter. Citi’s results factored in $6 billion in writedowns on subprime-related securities, $3.1 billion on leveraged finance commitments, a downward credit value adjustment of $1.5 billion, writedowns of $1.5 billion on auction rate securities.

To any normal thinking person the news above mean this is the time to sell.  But to a stock investor who knows how the market works, the words “the shares rose” means that bad news drew interest.  If the trader buys quickly, then the stock can be rolled.  Think Bear Stearns which went to $2 and over the weekend ratcheted right back up to $10.  Someone who bought on Friday night made $8 a share after commission when the stock was sold on Monday.

 The same normal thinking person might wonder how we ever got to this state where bad news for a company and its employees (Citigroup plans about 9,000 layoffs) turns into good news for the stock market.  So here’s the deal.  Stocks rise and fall on the tide of buyer interest.  If a stock falls in value, buy low sell high rules apply.  So if a stock’s chart shows underlying strength, this temporary fall will naturally generate interest from investors.  The interest engendered causes the stock’s value to increase and presto chango you’re in the money.


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