There's so much to understand about the economy, the financial world and the news, so Marketplace Weekend is launching a new series called Five Things. The idea is simple; take a financial term or an issue that impacts the economy, and the Weekend team will find experts to share five things you should know about it.
To kick things off, we talk earnings reports, thanks to the slew of companies releasing numbers this week. Nicholas Bloom, a professor of economics at Stanford University provided some insights.
1) Earnings reports and the economy
The stock market doesn't equal the economy. So Wall Street is not the same as Main Street. Many of the largest firms on Wall Street actually make most of their money abroad, so they can be doing very nicely, but the domestic U.S. economy can be tanking. Earnings can give us a smoke signal of what is going on in the domestic economy but they are definitely not the same.
2) Earnings reports and taxes
Companies doing well doesn't mean more taxes for the federal government. Many companies are making huge amounts of profits but storing them overseas to try and avoid paying corporate taxes. So even if a company is doing fantastically, it doesn't help us in terms of more taxes if that money never comes back to the U.S.
3) Earnings reports and accuracy
Earnings forecasts and earnings numbers are incredibly massaged. I like to think the earnings numbers are probably more massaged than a linemen after the NFL Super Bowl. And the reason is companies know that Wall Street jumps in the minute new numbers come out. They're very aware of that and they do their very best to make these numbers look as good as possible. Don't believe the bottom line. You really have to pore through the details and pull it apart with a microscope and a pair of tweezers to understand actually what's going on.
4) Earnings reports and investments
The classic investment advice is don't buy single stocks. The reason is single shares are much more expensive to buy and sell so you pay more commission costs and they tend to be more volatile. The best advice from financial experts is actually to buy simple index trackers. They're cheap to buy and sell and they give you a good return for a low level of volatility.
5) Earnings reports and price per share
Normally the figures are earnings per share. But earnings per share differ massively depending on the company and how many shares they put out. So for example, if your company is making $100 million and you have 100 shares, that a $1 million of earnings per share. Whereas if your company has a million shares, that $100 of earnings per share, and that's a huge difference. So the first thing that you want to look at is earnings per share, but the second is you want to know how many shares and what the rough earnings should be. But really the only way to do that is to look at where they were last year.
Got a question about an economic term you'd like to know more about? Email firstname.lastname@example.org