Stock prices are determined by a variety of factors. There are a number of theories on the subject of what determines stock price. Some say that supply and demand play a large role in determining stock price, while others say that only earnings, revenue , and dividends determine stock price. Some say that the market value of a firm’s assets play a role, others claim that earnings per share are what matters. The truth is that all of these factors come into play to determine the price at which buyers are willing to buy, and sellers are willing to sell shares of stocks.
Over time, the value of a stock changes based on how much the market is willing to pay for it. This is called market valuation. There are several different ways that people determine what the market value of a firm’s shares are. One way that this can be determined is by using an asset to earnings ratio (A/E). This number tells how much it costs to buy all of the assets in a company with cash, which is based on how much cash the company earns in one year. This number also tells what it would cost someone to buy all of the shares of stock if they had enough money for them. For example, if a company has an A/E ratio of 10, that means that it costs $10 to buy one year’s worth of assets and that it would cost $100 to buy all of the company’s stock. An A/E ratio of 10 indicates that people believe that a company is fairly priced and neither over or undervalued.
Some investors look at just the price-to-earnings (P/E) ratio when thinking about buying a stock. This number tells you what the market is willing to pay for each dollar of profit, and it might offer some insight into whether or not a company’s stock price is fair. P/E ratios can be used to compare similar companies and to see if they are overpriced or under- priced (but only to a certain extent). For example, if one company has a P/E of 20 and another has a P/E of 40, the first company might be considered overpriced when compared to the second.
By looking at returns on equity (ROE), investors can determine how efficient management is with the assets that they have been given. ROE tells an investor how much profit a company makes compared to the book value of its assets. If ROE is low, it could mean that management isn’t being efficient with the money they have, or that their assets are overpriced.
Many investors believe that earnings per share (EPS) can help them determine whether or not a stock is overpriced or under- priced. This is a more helpful way to look at things than the P/E ratio, because it tells you how much profit a company makes per share of stock instead of just on an overall basis.
Summary: The author writes about his personal thoughts and opinions on what he thinks is the main factor that determines the stock price.
The article “What Determines Stock Price?” written by director and chief financial officer of Global Value Fund, LLC, Jim Cramer, talks about his opinion and thoughts about what really determines a companies’ stock price.
Cramer says that a stock price has nothing to do with how well a company performs or if it is generating a profit, but it is just simply what people are willing to pay for their stocks. He calls this the “greater fool theory”, which basically means that there may be no real analysis behind the actions of the investors, they just buy and sell based on the sentiment of the market.
Cramer also brings up a point about how often people use stock price as a barometer for whether or not the company is actually doing well. He says that these companies are reporting good numbers yet their stocks continue to fall, which could be because they now have higher expectations for the company.
Cramer also defends his view about how many of these companies that are reporting strong results at their shareholder meetings, which means there is nothing wrong with the company, but just that it happened to be “less bad”. He says that if a CEO acknowledges that they had a bad quarter then their stock value will drop dramatically, but if the CEO ignores it then there may not be any changes in their stock price.
Cramer does acknowledge that certain sectors were indeed under pressure, such as the energy sector and retail stocks, which is where a large amount of their clients’ money was placed. He says that he actually saw this coming because of the high valuations of these companies and the low returns.
Cramer also says that he had a hard time understanding how certain things had such a great impact on the growth of companies, such as mobile technology and social media sites like Instagram and Pinterest. His belief is that they do not add any value to the company’s overall prospects or even add any revenue for the company. He thinks that these technology companies have a hard time being valued at their high prices because they do not have any solid business plans or even a revenue model.
Cramer does say is that there was one particular stock he felt very confident about during the quarter and that was Facebook, which saw its share price increase by over 50%. He says that Facebook is still growing and they will continue to grow because their business model of allowing advertisers onto the site has proved successful. He feels that people are starting to trust Facebook more as a reliable news source, which would increase advertising revenue for them.
Cramer also defends his view about how he does not understand why so many companies have such high price-earnings ratios. He thinks that there is no fundamental reason why investors should be willing to pay such a high premium on these companies’ stock and he does not think they will continue to sustain their current valuations.
Cramer says that the best way to make the most out of the market is to invest based on what you believe in and not just based on what everyone else thinks. He says that the reason why people are buying into certain companies is because they see them doing well, but if they have not done their own research then it may not be the right company for you to invest in.
Cramer goes on to say that if you want to make money in the stock market then you need to stay on top of it and look at the numbers yourself. He says that if you keep your eyes open on what is happening on Wall Street then you will be able to make the most out of the current market conditions.