Why does the market hate uncertainty?

The market likes to know what is going to be happening tomorrow, but unfortunately the markets are just generally uncertain.

I can’t tell you whether or not the stock market will be higher or lower tomorrow.  I can’t tell you what is going to be happening in the Eurozone.  I can’t tell you what is going to be happening in China.  So therefore there is always uncertainty in the market.

But what analysts like to do is to put numbers into their spreadsheets.  They want to know that, if they were buying shares in a company, let’s say Brambles (ASX: BXB), they would like to know what the company’s profits are likely to be in 2013, 2014 and 2015. Only by having that information are they able to discount all of those profits back to today, to come up with a valuation for Brambles.

Now, analysts can’t do those calculations with certainty for various reasons. They don’t know what will be happening to interest rates, or what is happening to sales. These factors create the uncertainty which makes it very difficult for them to come up with a valuation for this particular company.

So analysts calculate the risk to see whether the risks are greater now than they were before.  When they are greater the share price gets marked down, which is why you tend to find, when things are very uncertain, the risk premium starts to increase, and so therefore the share price starts to fall.

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

 More reading

The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, a podcast by David Kuo, originally appeared on

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.