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Does net income matter to stock price?

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George Smith owns a lot of investments in common stock. He says that he does not care what a company's net income is because the stock price tells him everything he needs to know.

How would you respond to George?

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George,

Your comment that stock price is all you have to know has a great deal of wisdom. After all, the stock price is what you pay and what you receive upon selling. So, the net income has no direct connection to your cash flow from buying and selling common stock (Wiki.fool.com, 2013). That is not quite the same as saying that net income is not relevant at all. It is one of many ingredients that impact stock price, although the correspondence with stock price can be moderate given the other influences.

Stock price results from buyers and sellers both estimating the future cash flows and negotiating a settlement price. They obviously have ...

Solution Summary

Your discussion is 369 words an two references and explains why George does not find net income all that relevant and how he might be encouraged to consider it as an important piece of data.

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