What Determines Price?
Stock prices definitely aren't a report card of the past. They are a bet on the future.
1. It's a Prediction Machine
If investors think a company will double its profits next year, the stock price will go up TODAY.
"Pricing In"
This is why a company can lose money right now but have a huge stock price (like many tech startups). The market is "pricing in" the massive profits they expect in 5 years.
2. The P/E Ratio
The Price-to-Earnings Ratio tells you how "expensive" a stock is relative to its profit.
Boring Giants
Think McDonald's or Coca-Cola. Stable, slow growth.
You pay $25 per $1 of profit.
Growth Rockets
Think NVIDIA or Tesla. Massive future potential.
You pay $60+ per $1 of profit!
3. No Profit? No Problem.
Price-to-Sales (P/S) Ratio
Some companies burn all their cash to grow fast and have zero profit. For them, investors look at Sales (Revenue). The P/S ratio compares the stock price to how much total business the company is doing, ignoring the costs for now.
4. Bulls vs. Bears
You will hear these animal names all the time. They are just nicknames for the mood of the market.
The Bull
Think of a bull attacking: it thrusts its horns UP into the air.
The Bear
Think of a bear attacking: it swipes its big paws DOWN.