The super-successful publisher Electronic Vision is going to release the latest installment in its Call of Honor franchise next month, and the gaming press is predicting that the game will be a monster hit and break retail sales records. So, you think now would be a great time to purchase stock and earn a quick and easy profit when EV’s stock price shoots up as soon as those sales revenues start pouring in.

Sorry, no, that’s not how stock prices work. Stock prices are not directly related to a company’s sales. Stock prices are based on supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

What makes people want to buy or sell a stock? A decision like this is based on whether the company has been having good news or bad news. So, wouldn’t record-breaking sales be good news. Well, not really, because it isn’t news. The gaming press has already determined the game would break records, so next month, when the game goes on sales, it is already expected that the game would sell well.  In fact, the game was probably expected to sell well when it was first announced.

But even that isn’t looking at the big picture.  When you buy stock in a game publisher, you are investing in not just one game but the publisher’s entire business — its assets, its liabilities and potential for future earnings.  Stock market investors also take into account the overall health of economy in general and the game industry in particular.  The sales of a single game might have very little impact on how well a publisher is considered a year from now — or for investors who are playing the long game, five or ten years from now.

 The game industry is a risky one, because there are more failures than hits, and anyone interested in actually earning money through their stock market investments should should minimize their risks by diversifying.  If you want to invest in your favorite game company, fine, but spread your investments out across a number of companies in different industries. That way, if some fail to earn you money, others will hopefully compensate for it.  But don’t expect to get rich that way. Day traders who spend all their time researching and investing in companies on the average receive only a 10-15 percent return on their investments.

Okay, what about a wealthy individual who wants to put money into a game company as an angel investor or venture capitalist?  How much money would he or she be willing to put in?  Well, that depends on how much the investor values the game company.  This value is not based on how cool the investor thinks the company’s latest game will be, or even on how well the investor thinks it will sell, because investors invest in the overall business, not an individual game.

There are three basic methods investors usefor determining the value of a business:

• Subtracting its liabilities from its assets.
• Dividing its expected earnings by its capitalization rate (net operating income / current market value).
• Comparing it against what similar businesses have sold for.

Of course, an investor would need access to company’s financials or do some market research to value it using one of these methods.

Now, that doesn’t tell you what an investor would be willing to pay, because it depends on an investor’s assumptions, sensitivity to risk, and how much ownership the investor is going to get for that investment.  Knowledgable investors want control of their investments so that they can use their knowledge to steer the company away from risk and towards profitability.  So, for the small game company that wants to make their mark by making product known for its creativity, giving up any control to an investor is probably not the way to go.

Getting back to the original question, is it worth investing in a video game company. Only if you really know what your doing. As with any investment, do your research and invest only as much as you can afford to lose.
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