Not correct. The price of the stock times shares outstanding is its value. Where does this value come from? Why are Apple and google doing so well? It's not, by your logic, because they are great companies - that would be an objective metric, no? Existence of the SEC doesn't make stock values subjective. Any argument here that starts with "some people" - is irrelevant. Everything we are discussing is about on average, statistically. On average, a beachfront condo in Miami will cost more than an equivalent condo in Iowa. Why? Because it's on the beach and people, on average, value that more than being somewhere in Iowa
ehhhh, no. Stocks do not only have value when SEC deems that it can have value. That is completely incorrect. SEC simply regulates equity issuance, it doesn't set the price of each stock. BMW costs more than honda because it is objectively a better car. By objectively identifiable metrics. Yes, it's true there are some people who love cold climates. But in the US people are moving from cold climates to warmer climates, on average - so real estate in warmer climates is growing in value faster. So, no, you are completely wrong.
Correct, but it's people's perception of value that ultimately drives the current stock price.
Take Amazon as an example, in 2016 its net income was $2.4 billion, yet it currently trades at a total market capitalization (the value of all outstanding shares) of $471 billion (or approximately 196x its net income) [0]
Compare that to Ford Motor Company, in 2016 its net income was $4.6 billion, yet it currently trades at a total market capitalization of $45 billion (or approximately 10x its net income) [1]
So Ford was actually MORE profitable than Amazon in 2017, but it's market capitalization is only 10% of Amazon.
So what's driving the differences? People's perception of value. People perceive that Amazon will be more profitable than Ford Motor Company in the future, even though objectively Ford is more profitable than Amazon right now.
I don't understand why everyone cares so much about stock price, an almost arbitrary measure of the value of a company, based on sentiments and not facts.
Isn't total equity the real indicator of the company's value in money?
Right, you've got it. There is no reason why your apple stock should have a greater value if apple does better as a company, other than the fact that as a collective we've all chosen to believe that your share "represents" a "slice" of the company, and we've also all chosen to believe that other people will value your "slice" more when the company does "better". There is no material meaning behind saying that your apple stock is a "slice of the company." In no material way is that true in a practical sense. You are not entitled to a percentage of profits, and you do not have any say in the way the company operates. As for my other point, we've all chosen to believe that other people will buy our stock for more when the company "does better". But "doing better" doesn't necessarily mean "is more profitable." Just look at WeWork for a counterexample. We're all just trading meaningless tickets with ticker symbols on them believing that they're valuable because someone else will buy them for more later. And because we all believe this, it's actually true. It's like a collective fever dream that never ends. Stocks are no different from Air Jordans or Dutch tulips - the value of individual stocks changes according to the stories we tell about them, which can be influenced by the company becoming more profitable, making an acquisition, laying people off, getting a new CEO, or any number of things. The value has so much more to do with the stories we tell about the stocks than anything else - because the stories determine what someone else is willing to pay for them. It's not about math, it's about psychology and group psychology.
I don't say this as like a really angry person shouting as a sky hoping it'll all stop. It just goes to show how as a group, we can make our expectations real by all expecting the same thing.
A stock is worth what people will pay for it. That’s it. Sure, there are models you can use to come up with a seemingly reasonable valuation, but that’s just a tool you use to make a wild ass guess.
If the companies value and ambition is to maximize the stock price then the stock price is a good metric. If the companies value is something else then stock price isn't really a good metric.
It will also attract shareholders that share those values and thus going against them will cause an uproar.
when you own shares in a company you are entitled to the cash flow of the company. Over time the price trends towards the future cash flow of the company.
In the short term the price can be anything, but if a company continues to grow and generate cash/profits, then the value will go up.
There is too much money chasing too few companies so multiples are high, but that is a temporary situation (that could last a decade).
Anything that happens in the short run is irrelevant to long term investors. In fact retail investors have a huge advantage over professionals in that they dont have to show returns every quarter.
The stock market price != value of the company. Stock market price == PERCEIVED value of a company. All the stock market does is try and find a equilibrium between parties that want to sell a stock and parties that want to buy a stock. That is it. It doesn't do anything more. You could have a company that is bleeding money month-after-month, is foretasted to never make a profit ever, but if there are more parties (for whatever reason) that want to buy the stock than those who want to sell then the price will go up. The actual financial health of a company is utterly meaningless, the only thing that matters is what investors think of company.
However, there are a whole class of stocks where the stock price is based on nothing more than perception of value. There is almost zero actual, intrinsic value. You see this often with penny stocks (and even larger companies, back in the dot-com days.)
You are confused. Deriving prices from actual earnings and fundamentals isn’t inherently better than people simply agreeing on what a share is worth based on their own feelings and information. One just rises quicker than the other, because it takes in account expected future values.
Ah shareholder value. Value is the keyword. It's not shareholder money per se. If a companies stock jumps because people think you are bold for making your own secure network equipment then you have created value. Security and privacy can make value. Look at Apple. Public perception of Apple makes up a nice part of their stock and it's based around (just to name some smaller ones) privacy and security.
I don't really buy this, simply because actual investors do not think this way. On public markets at least, there is some expectation that a stock price will have some relationship to expected future earnings. When the price is out of whack with those future earnings, the stock is under- or over-valued - and I would say that this is objectively true even when there is no way of knowing. Of course, there very often is a way of at least taking an intelligent guess, which is why Warren Buffett is so goddamn rich, for one.
Otherwise, we are left believing obvious absurdities: for example, somebody who bought Bear Stearns at $60 on March 13 2008 got just as good a deal as somebody who bought Bear at $3 on March 17; Bernie Madoff's fund management services were worth every penny until his arrest; etc. There is nothing 'subjective' about either Bear's hiding of the worthlessness of its subprime books or the fraudulence of Madoff's scheme.
No, I'm saying that eventually the value of a company is based on actual economic reality and not sentiment. Companies are either profitable or not. They either grow or not. In the end, share prices are based on these things, not just the whims of investors.
The stock market is not trading in baseball cards.
"stock only has value because people believe it has value"
Unless this is an indictment of all pricing, it seems short sighted as companies have assets and cashflow that exist beyond belief. When you buy stock you are buying a (small) percentage of everything that company owns.
That is of course true. However, I've noticed many seem to justify any stock price being low as the market already pricing in all the information. However when you look at AAPL's valuation 1-2 years ago, shares went down to a low of around $90, which was only like 6-7 FCF or so (it's a little complicated cause you had to subtract apple's cash hoards but also multiply by some uncertainty factor < 1 that represented the probability that they would be able to bring the money back).
Meanwhile you have companies like MSFT, etc which while growing at a fast rate, are far, far more expensive on a FCF yield basis.
Ultimately - and this is pretty obvious but worth stating - you have to come up with your own valuation for a given company when making investment decisions.
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