The Only Reason Why Share Price Increases

When you invest in the stock market - you want the share price to increase over time.

This is called capital appreciation.

However, how do we know if the share price will increase?

The answer boils down to a single statement:

Let's say if 10 years later, I was able to increase the rental to $3,400 - twice the intial amount.

How much do you think the property would be worth?

Well, it will be worth at least $1,000,000 - since its giving me twice the initial rental income.

(It wouldn't make sense for me to sell the property at lesser than that amount.)

Now - let's go back to the stock market.

In 2016, Facebook made $10B in net income. The share price was around $115.05.

In 2023, Facebook made $23.2B in net income. The share price was at $296.73.

Could you see that the share price increased is correlated to the company's earnings?

Of course, in between these periods, there are going to be share price fluctuations.

(Fluctuations are great to allow us to buy shares undervalued, by the way)

In the long run, share price will always follow earnings.

In fact, let's look at some examples of companies that have a trend of increasing earnings.

You will see that there is a relationship between the share price and the earnings of the company.

(None of the following stocks are stock recommendations)

Can you see that when earnings of the company increases, in the long term, the share price will increase as well.

It is just that straightforward - just like the house example I described previously.

So how do you find out the earnings of companies?

Well, its a simple 3 steps process.

Step 1 - Go to ROIC.AI

Step 2 - Enter The Company Ticker Symbol (i.e. META)

Voila - you have the entire 10 years of the company's earnings.

You now know where to find out the earnings trend of the company by following the steps above.

So now, it is time to test your understanding.

It's quiz time - because I want you to benefit from this stock investing hub.

Based on the earnings trends shown, will you rather invest company X or Y? (Click to Enlarge The Image)

Well, if you have been following this chapter - you can easily know that you want to invest in company X.

Why?

Because its earnings are on an uptrend - so what is likely to happen for the share price?

Just by investing in a company that shows an uptrend in earnings, will win you half the battle in investing.

Because, the odds are in your favor that the share price will increase over the long term.

This is also why I will never invest in a company that does not have a positive earnings trend.

You might be wondering, "How do I know if the share price will continue to increase?"

Well, you never know for sure.

But, while past performance is not a indicator of future performance, it can be a good predictor.

Its kinda like if your child have been scoring an "A" for maths for 5 years, it is likely he will do well for maths in the future as well.

Here's the bottom line - never invest in a company that does not have an increasing earnings trend.

Disclaimer: Any securities or trades mentioned in this article is not a buy or sell recommendation, any form of investments have its risk and due diligence is to be performed before any investment.