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Company’s Financial Health
The laws of supply and
demand explain why share prices fluctuate. But how do
investors and analysts arrive at their decisions as to
whether a share is worth buying or selling at a given
price?
People invest in shares
to make a profit. This profit comes in part from the
dividends that the company distributes to its
shareholders (their share of the profits of the company)
and partly from the increased value of the share. So
when assessing the value of shares in a particular
company it is critical to examine the financial health
of the company.
Investors are not likely
to put a high value on shares in a company that is going
to lose money. They look for a business with a history
of making strong profits and consistently paying healthy
dividends.
Investors also analyse
the company's future prospects. A company with a poor
history may well be set for a promising future, and one
with a good history might be on the way down.
Careful investors also
review how a company fares against its competition and
whether it is being run by experienced, responsible
people who keep up with current trends. If a company is
viewed by potential investors as likely to increase its
efficiency or if it produces new, innovative products,
its share price is likely to rise.
Alternatively, trouble
on the horizon such as more intense competition,
decrease in demand for its products, damaging lawsuits
or threats of industrial action can depress the value of
a company's share.
The report of a
potential takeover, that is when another company is
trying to buy some or all of the shares in the company,
usually forces up the price of shares in the company.
This is because the purchaser has to buy a majority of
the shares to gain control of the company and to do so
the suitor must persuade shareholders to sell their
share by offering an attractive price for their shares.
Next:
The Industry's Financial Health
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