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Stock prices: Come on down and play the estimates game
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Q: Why do investors seem fixated on how much earnings beat or miss estimates? Why does that matter?

A: Investors are always looking ahead, not behind.

That a company's earnings came in 20% higher or 20% lower than the previous year's results isn't what matters most to investors. If investors expect a company's earnings to be up 20%, and earnings are up 20% when the company reports results, it wouldn't be unheard of for the stock to be unchanged, or even lower.

Since investors anticipate the future, they buy and sell stock based on their estimates of the next six to 12 months. And if the group of investors and analysts guessing about the company's future is correct, that means the stock has already "discounted" the news, or, reflects the news in the price.

Investors try not only to guess the future, but also to understand what other investors think the future will be. For instance, if everyone believes a company is going to report stellar earnings in the next quarter, they would drive the stock price up and then the advantage of the good prediction would be traded away.

All this is a big reason why investors monitori corporate earnings news for "surprises." It's when a company performs much better or worse than expected that a stock can have a dramatic reaction. If a company reports much better-than-expected results, the stock may jump to reflect good news that wasn't in the stock price before the announcement.

Have a headache, yet? The pros not only look at fundamentals, they also second guess other investors, looking for an edge they can profit from. That's how the game is played.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz

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