At the most basic level, stock prices are related to demand. When many people want to buy stock in a certain company, the stock price goes up, and when a lot of people are trying to get rid of a stock, its price goes down. But there are several other factors that go into a stock’s price.

If investors think a certain stock will do well, they will buy it and its price will go up; the reverse is also true. Stocks don’t exist in a vacuum, so their environment (both in general and specifically) affects their price. How is the company that owns the stock doing? Has it released positive earnings reports or a new product that shows promise? Investors also examine the social and economic climate in general – interest rates, political interest in certain businesses, and so on. Lastly, there’s the market itself to consider: during a bull market, everyone is buying stock, so stock prices in general tend to go up.

The stock market is tricky because it relies so much on anticipating things before they actually happen. A stock’s price will go up if it is popular, but investors may also buy that stock because they think it will become popular in the future. If enough people have this hunch, investing can become a self-fulfilling prophecy.

In the very near future, you’ll be able to buy stock in a company you like by clicking three times within a Facebook app. Yes.

The start-up behind this investing revolution is Loyal3, and its goal is to make a boatload of money. But its other goal is to make it easy (and free) for average people to buy stock in the companies they like. And its other other goal is for companies to make it easy (and free) for average people to buy stock in their company, and thereby earn more loyal customers. Uh, investomers.

Amazing, right? The Internet and mobile technology have already revolutionized philanthropy – now anyone can donate $10 instantly with just a text message – so it was only a matter of time before the financial industry got in on the action. (Ahem.)

But this guy is a little concerned about making “mindless” investing available to the next generation. Why encourage people to buy stock without first giving them the proper tools for learning about the health of the company? Loyal3 could be a great opportunity for young investors who want to try out their growing knowledge about investing. But it could also be the next bad idea – we’ve seen the damage that can be caused by blindly handing money over to people who make promises without showing us what’s behind the curtain.

Would you buy stock on Facebook if there were no fees associated with it?

When you have a lot to lose, how likely are you to engage in risky behavior?

Apparently people with a lot of money to lose – people known as “the wealthy” – are pretty likely to take those risks. But not simply because they can afford to lose here and there. Many of them are just hard-wired that way.

At least, according to this study by Barclays Wealth. We definitely don’t endorse trying to make money by taking excessive risk or doing things like trying to time the markets. But, interestingly, neither do the millionaire risk-takers themselves. Most of those who reported trading more often than they should also reported feeling guilty about it – and slightly out of control.

Surprising, right?

What’s your risk tolerance? Find out by taking our Risk Assessment Quiz!

He stopped by to talk to us about how a crashing stock market changes the way investors invest. (Hello, recession of 2008!) Pretty interesting stuff. Check it out:

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After so much media coverage devoted to videos of water swallowing up cities, we were interested to see this Reuters article from Monday about the financial implications of Japan’s bad luck.

The stock market is operating under very rare conditions, and some of the news was really surprising. For example, this is the worst hit the market has taken in two years… but it’s the worst natural disaster the country has ever seen. Why didn’t the markets totally crash?

As a matter of fact, some stocks and sectors were actually doing very well on Monday. Here are some interesting facts from the report:

• - The construction industry was booming, probably because demand for rebuilding will soon be enormous.
• - Stock in the company that owns one of the nuclear power plants in danger of meltdown – Tokyo Electric Power – dropped 24% almost immediately.
• - The technology sector, once one of Japan’s strongest, took a nosedive.
• - Investors were selling off their long-term bonds* (20 years or more), which means that they’re not confident Japan will be able to repay their bond debts in the future.
• - The earthquake happened on Friday. By Monday, the Bank of Japan was ready to announce that it would inject 15 trillion yen (about $187 billion) into the economy to support it during the crisis. (Kind of like the U.S. Treasury has been doing here to keep the economy afloat during the recession.)
• - This vote of confidence inspired investors to purchase more short-term bonds (10 years or less).

This just goes to show you that changes in the stock market are all about what investors predict. These predictions can be rational or irrational, but the speculation never ends – no matter what happens.

* A bond is a kind of debt sold by governments and corporations to raise money. Basically, when you buy a bond, you’re buying the seller’s promise to pay you back (usually with a fixed interest rate) on a predetermined date.

credit: Smudge 9000
Here’s the interesting thing about earnings reports: they give investors important information about the past and the future.

For example, overall profits are expected to be 9.8% higher than they were at the end of 2009. (Makes sense – 2009 was a pretty rough year on the economy.) But what about the years before that? Are there any companies that usually bring in 15% profit that are now earning less? Maybe 10% is their new normal. Would you be satisfied with that, as an investor, or would you prefer to find a company with a better track record?

Companies’ past earnings aren’t as important as their future earnings. Even though overall profits rose at the end of 2010, it looks like they’re not going anywhere in 2011. Why? Well, the job market hasn’t really improved. People without money can’t spend money, and companies can’t profit without money.

There are some exceptions: even though the job market is in bad shape, companies that sell luxury goods to a different market have continued to perform well. You can also predict future earnings based on new laws and tax policy. FedEx and Novellus Systems will both be taking advantage of a tax break to buy themselves new computers and cargo jets. (Those purchases not only benefit the businesses – they also increase profits for technology and airplane manufacturers.)

A little bit of bad news for companies that depend on consumer spending to boost their profits:
“…we’re not going to see sustained declines in the unemployment rate.” – Ben Bernanke, Chairman of the Fed

• Using a branch of artificial intelligence called “machine learning,” some investors are trying to create an AI that can analyze market data, make predictions about the future, decide which stocks to buy and sell, and learn from its mistakes.
• The advantage of using an AI program is that it can process huge amounts of data in a short time. But there is no guarantee that the program’s calculations will remain accurate if fundamental market conditions change.
• One of the companies pioneering this type of AI is Rebellion Research, a small hedge fund based in New York run by a quartet of investors in their 20′s. In recent years, the company has performed better than both the Dow and the S&P 500.

Facts & Figures

• Rebellion Research has beaten the S&P 500 index by an average of about 10% a year since 2007.
• In 2009, the hedge fund increased by 41%, whereas the Dow only increased by 19%.
• Star, Rebellion Research’s AI program, keeps track of approximately 30 factors that affect a stock’s market performance. It usually holds between 60 and 70 stocks at any given moment.

Best Quote

“It’s pretty clear that human beings aren’t improving.But computers and algorithms are only getting faster and more robust.” – Spencer Greenberg, one of the founders of Rebellion Research

Divya Narendra is the 28 year old CEO and co-founder of SumZero, a website designed to help professional investors to share their investment ideas and network with one another. Running a business isn’t easy work, and so Divya spends his days generating new feature ideas, consulting with lawyers, forming partnerships with third parties, marketing the website, and yes, even handling the company’s bank accounts. He paused the work whirlwind for a moment to talk with TILE about starting up a start-up.

TILE: How did you get the idea for Sumzero?
Divya: The concept of SumZero was partly inspired by Wikipedia and partly by social networks such as LinkedIn. My co-founder and I wanted to create a universal, user-generated investment idea database consisting of rigorous investment recommendations whereby only professional hedge fund, mutual fund, and private equity analysts were allowed to contribute. This idea database is structured within a transparent social network enabling site members to connect over shared research, educational affiliation, prior employers, asset class expertise, etc.

TILE: What was one of your biggest challenges in starting the company?
Divya: One of the biggest challenges we’ve faced (and one that is faced by nearly all start-ups) has been building a team that is committed to growing SumZero.

TILE: Did you always want to go into business, or did you fall into this career path?
Divya: I first knew I enjoyed entrepreneurship when I was a junior in college. That year, I created a website aimed at connecting college students and alumni.

TILE: What’s in the future for you/ Sumzero?
Divya: We are currently working on raising capital to give SumZero the necessary financial resources to take the company to the next level. We hope to one day become the de facto platform for buyside analysts to exchange research.

TILE: What advice would you give your teenage self?
Divya: I would advise my teenage self to learn web programming to avoid having to hire others to do the job.

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