[quote=XBoxBoy]Threadkiller, you seem to be suffering from the misconception that prices of stocks are linked to the underlying fundamentals of the company. [/quote]
Occasionally, stock prices ARE linked to the underlying fundamentals of the company. The problem, of course, is that this is the exception rather than the rule. One should not expect this to be the case more than maybe, say, 15% of the time. The other 85% of the time, the prices are just noise.
[quote=XBoxBoy]
Stock prices instead are based on what traders think other traders will pay for the stock in the near future.[/quote]
In the short term, yes. But the longer your time horizon, the greater the likelihood that you can count on stock prices eventually reflecting underlying fundamental value. But, as you can see from the performance of US stocks in aggregate over the last 130 years, stocks can spend long periods of time – up to 10 years in some cases – dramatically over- and under-valued. “Fundamental value” is both esoteric and not for the impatient.
[quote=XBoxBoy]
Typically, when a company buys another company and then lays off a bunch of workers, that stock will bounce. [/quote]
This is incorrect. Typically when one company buys another – regardless of proposed “synergies” – the acquirer’s stock goes down. This occurs in at least 80% of cases and there are reams of academic studies supporting this. The reasons are threefold: (1) Generally purported synergies (cost savings, for example) don’t show up – that’s marketing to get the deal done – and the market knows they’re not going to show up, (2) in a competitive market – which most US merger markets are – the acquirer overpays, by definition (“the winner’s curse”), and (3) in acquisitions involving the stocks of two publicly-traded companies, arbitrage activity pushes the stock of the acquirer down and the seller up.
OCCASIONALLY, the stock of the acquirer will go up when a merger or acquisition is announced. But this is the exception rather than the rule.
