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# How Events affect Perception and Investor Confidence

Company warnings. When a company itself advises stockholders that it won't meet its next earnings estimates, the news should be taken very seriously. This kind of announcement automatically causes such a fall in the price of a stock that it's a safe bet the company is telling the truth. Therefore, company disclosures are one of the best ways of knowing what's likely to happen to future earnings.

Interest rate changes. The lowering of interest rates has two potential impacts on stocks, both generally thought to be positive. First, the prevailing sentiment is that lower interest rates give consumers more money to spend, which translates into higher profits for businesses, which in turn makes companies more willing to spend money on inventory, research, new products, and expansion â€?all of which stimulate the economy. Higher profits are expected to lead to increased earnings, so investors become more confident about the future earnings potential of companies in general. In this way, lower rates are intended to produce a positive ripple effect throughout the economy.

The second positive impact of lowering interest rates has nothing to do with market perception of future earnings or investor confidence at all. Lower rates simply make investors less likely to buy debt instruments (bonds) and more likely to buy equities (stocks), thereby driving up stock prices across the board.

Conversely, an increase in interest rates has precisely the opposite effect. Higher rates cut into business profits and act as a restraint on consumer and company spending, all of which work to slow down the economy. And higher interest rates siphon money out of the equity markets and direct it toward debt instruments.

Insider trading. If company insiders use their own money to buy stock on the open market, it's a pretty good sign that they believe their company's future earnings are going to be better than the market expects. At minimum, it indicates that they feel the company's stock price is too low at that time. And company insiders should know the company's prospects best (of course, insiders aren't always right).

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