Investing basics: which financial news matters?
Too frequent trading and rushing for the door on a dip is likely to have a more negative impact on your returns than holding your nerve. Separate the news from the noise.
"ASX200 drops 2 per cent"... "All Ords gains 61.39 points"... "Company X shares soar on profit upgrade"
For anyone who has flipped through financial news channels or scanned the business pages, you'll know that these phrases pop up all the time. But what are the All Ords and the ASX200? What does it mean when a company misses earnings targets or gets downgraded by an analyst? And is any of this stuff important for you as an investor?
In this article we'll unravel the meaning behind the complicated terms and phrases you read in the news. Then, we'll give you some tips on how to turn down the noise, so you can focus on the news that helps you grow your wealth.
Stock indexes
The All Ordinaries Index
"The All Ords gained 61.39 points"
Known colloquially as the "All Ords", this is the oldest Australian index and is considered a barometer for the whole stock market. The index is composed of 500 of the largest ASX listed companies weighted by market capitalisation. The market cap of a company is the number of a company's shares outstanding multiplied by its price per share. This weighting is done so that a company's influence on the index is proportional to its size.
Source: Australian Broadcasting Company, Late News 17/10/2018
S&P/ASX 200
"ASX 200 drops 4 per cent"
The All Ords usually gets most of the attention, but the S&P/ASX 200 Index is arguably more important to the investment world. Standard and Poor's Australia Securities Exchange 200 index is a measure of the value of the largest 200 listed companies, weighted by their market capitalisation.
Index funds that track the S&P/ASX 200 – such as the iShares Core S&P/ASX 200 ETF – hold billions of dollars, and many investment professionals track their performance against this index.
BREAKING NEWS – what to watch for
"Aged care sector braces for royal commission"
Every year, the same types of announcements send investors scrambling, a shock announcement that impacts the stock market.
An investigation by a governmental or regulatory body such as ASIC, APRA, the Senate or a royal commission, are such events. A significant lawsuit which may place a company's future in uncertainty is another. Changes in federal or state regulation can also affect a company's prospects.
On the economic front, investors keep their eyes peeled for data released by global central banks such as the Reserve Bank of Australia, the European Central Bank and the Federal Reserve in the US.
Earnings expectations
"Wesfarmers tumbles after missing on earnings and guidance"
Equity analysts analyse companies and provide forward-looking earnings estimates. If a company's actual results fall short of analysts' expectations, this may cause the company's stock price to fall. Conversely, if a company performs better than what analysts expect, it may cause the stock price to rise.
This can be confusing to investors as even positive, profitable results, when they fall short of expectations, can cause a share price to fall.
Analyst upgrades and downgrades
"Qantas shares soar on analyst upgrade"
Equity analysts can provide recommendations of 'buy', 'hold', and 'sell' for the stocks they cover. Depending on how influential the analyst is a change to this status can move the share price.
Morningstar equity analysts calculate a fair value estimate for stocks which they upgrade and downgrade according to the prospective cashflow of the company.
Rising above the noise
"Telstra board fires back after shareholder strike"
If you want to keep up to date with the latest finance news, options are a plenty. Walk into any newsagents and you'll see all sorts of titles dedicated to the business world – as well as headlines of varying tones offered up by the tabloids. But this mountain of news can by dizzying and a little scary when news events cause stock prices to swing wildly.
As you digest the news, ask yourself: does this new information affect the long-term competitive advantages the company? Only then should you consider whether a change is needed in your stock portfolio.
Successful investing requires you to keep a steady hand. Your resolve and willpower will be regularly tested as markets reacts to news. Remember that not every bump in the road will send a stock off the cliff. And not every breaking news story requires an action; In fact, very few do.
Too frequent trading and rushing for the door on a dip is likely to have a more negative impact on your returns than holding your nerve. Separate the news from the noise and you’re more likely to emerge with good long-term investment results.
More in this series
• Investing Basics: How to build and invest your emergency fund
Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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