Layoffs and Stock Prices

QLate last month, a video game company announced that it would lay off about 5% of its staff — some 670 people. I would have expected the stock to plunge on that news, but it didn’t move all that much. Why? — S.R., Tucson, Arizona A Layoffs are definitely bad news for employees, but they’re not necessarily bad for companies (though this stock has shed some value since you wrote).

Some layoffs occur when a company is in deep, intractable trouble, but others happen when a company reorganizes, aiming to cut costs and be more effective with fewer employees. Trimming fat can be helpful, but cut too much, and you might be cutting bone.

In general, the stock market’s reaction will depend on what investors think. If they believe the move will greatly help the company, they may bid up the shares. If they see the layoffs as a bad sign, many might sell their shares.

Q

I’m a new investor, and I want to start buying stocks. How should I invest so that my money is safe and grows? — F.T., New Canaan, Connecticut

A

Take some time to learn more about stock investing before jumping in, so that you enter the market with reasonable expectations. For starters, there will always be some risk with stocks. You can reduce it by diversifying, though. The simplest approach is just to keep adding money to one or more low-fee broad-market index funds, such as one that tracks the S&P 500, over a long period.

Understand, too, that the stock market will undergo mild or severe downturns every few years — but it has always recovered and gone on to new highs. You can learn a lot at Fool.com.