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NEW YORK (TheStreet) -- A company and its stock aren't the same thing, Jim Cramer told "Mad Money" viewers Wednesday. He dedicated the show to educating investors as to how stocks really work and what makes them move.
Cramer said it's easy to assume a company and its stock are synonymous, but that's simply not the case. While over the long haul winning companies usually produce winning stocks, it would be irrational to think the two will move in lockstep with each other. There are, after all, tons of factors that can make a stock fall, many of which have little to do with the performance at the company itself.
One of those factors has been the rise of exchange-traded funds as an easy means for investors to gain exposure to an entire sector. Cramer said ETFs, many of which buy and sell with leverage, have the effect of moving an entire sector all at once, taking the good companies along with the bad and even the mediocre. This means a stock's sector has become even more important than in years past.High-frequency trading is another factor that causes stocks to move in ways you might not expect, said Cramer. These nimble investors can hijack an entire market and cause explosive moves both to the upside and the downside. Then there are the issues of hedge funds and short-sellers causing volatility. Cramer said when a lot of shorts pile into a stock and something good happens, the move to the upside can be mind boggling. Markets are, after all, dominated by supply and demand, said Cramer. Once investors realize that, they will become better-informed investors.
Do Your HomeworkSo with stocks moving for so many different and sometimes arbitrary reasons, why should investors spend time researching and doing homework on their stocks? Isn't it all just a waste of time? Absolutely not, said Cramer. All investors need an edge and homework can provide one, said Cramer, especially in a market where many investors panic and sell at the drop of a hat. Having done your homework and having conviction in the stocks you own will remove emotion from the equation and help you buy when others are selling.
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