One of the most exciting (and most memorable) experiences for many students in high school is the opportunity to play the Stock Market game.  As I have written before, I am not a big fan of the game because it encourages the very behaviors that often lead to suboptimal investing performance: overconfidence (for the winners), trying to pick individual stocks and focus on short-term performance.

Around earnings season, we get a good reminder that there is risk in stock market investing, particularly in the technology sector. Investors have high expectations for high growth stocks and when they disappoint…well, watch out below. This chart from the Visual Capitalist demonstrates that well:

• Why did each company’s stock price change so dramatically?
• What is a catalyst in stock market parlance?
• What are the financial metrics that investors following closely?
• What do these dramatic swings tell you about investors’ ability to predict earnings for these companies?

• Demonstrates the importance of quarterly earnings results and the forward guidance that executives often given on their earnings calls.
• Shows how an earnings beat or earnings miss can lead to large short-term swings in stock prices.
• Sharp price swings also show how investors (yes, even professionals) can be surprised by company results. Remember that there are thousands if not tens of thousands of analysts following stocks like Apple and yet most didn’t see the earnings miss that they experienced. Not sure how a casual investor can expect to have better insight.
• Gives you an opportunity to explain what is meant by consensus and why it matters. Consensus an average of earnings per share and revenue that is calculated by taking the forecasts of research analysts who follow these companies. This is what a company’s ACTUAL earnings are compared with.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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