Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

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Derivative
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Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by Derivative » Wed Dec 27, 2017 11:37 am

Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold? What determines whether stock prices go up or down? Is it solely supply and demand for the stocks? Doesn't that make all stocks extremely volatile?

Are stock prices based on any other value? Like, if you are buying a stock, you can't say you are buying a portion of the building of a company right? If stocks actually allowed you to own a portion of the building of a company, it would most certainly be less volatile as you can get your money back after you sell the building.

Are there any kind of investment that has more intrinsic value (I am guessing only real estate) or do stocks hold some intrinsic value so that they won't fall below a certain threshold?

I am a newbie when it comes to how investment works. Where can I read more about the questions I am having to truly understand how stocks and the stock market works?

Thank you and Happy Holidays to everyone! :)

snarlyjack
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by snarlyjack » Wed Dec 27, 2017 12:08 pm

Derivative,

Let's say I own McDonalds.
I own the value of the building, equipment, land +
the value of the advertising (brand) + cash flow + more.

Think Coke Cola. Buildings, land, franchise, logo, trucks,
equipment. product, inventory + cash flow + more.

Think stock. The stock has value, dividends, price to earnings + lot's of
ways to value a stock (fundamental measurements).

People get college degrees in studying & understanding the value
of a stock. Accountants, Lawyers, Money Managers, etc.

My Mom used to tell me to study, study, study.

Snowjob
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by Snowjob » Wed Dec 27, 2017 12:22 pm

Derivative wrote:
Wed Dec 27, 2017 11:37 am
Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold? What determines whether stock prices go up or down? Is it solely supply and demand for the stocks? Doesn't that make all stocks extremely volatile?
Basically, yes.
Derivative wrote:
Wed Dec 27, 2017 11:37 am
Are stock prices based on any other value? Like, if you are buying a stock, you can't say you are buying a portion of the building of a company right? If stocks actually allowed you to own a portion of the building of a company, it would most certainly be less volatile as you can get your money back after you sell the building.
People buy them because they believe a company will earn a profit, now or in the future and in turn that profit will be used to grow the business or return those profits to the owners, the shareholders.

you have claim on the assets of the company including any buildings, however so do all the other stock holders and bond holders. In the event of a liquidation / bankruptcy the bond holders will have their claims satisfied first, any remaining value will be divided among the stock holders. Outside of an event like this, you will never get a 'piece of the building' and even so, you will likely just get a small share of the reorganized company. or if full liquidation happens some monetary compensation after the remaining assets have been sold.
Derivative wrote:
Wed Dec 27, 2017 11:37 am
Are there any kind of investment that has more intrinsic value (I am guessing only real estate) or do stocks hold some intrinsic value so that they won't fall below a certain threshold?
the reason real estate is not volatile is you are not buying and selling single family houses thousands of times per second all day long. the liquidity, transparency, regulatory controls and virtually 0 transaction costs are the reason stock markets have the volume they have. They are both more efficient in pricing, and yes more volatile because any change in available information or emotional shift by the market participants (buyers and sellers) will affect bidding and the prices will shift instantly. If you want certainty, you can buy CD's, to federal bonds.


I am a newbie when it comes to how investment works. Where can I read more about the questions I am having to truly understand how stocks and the stock market works?

Thank you and Happy Holidays to everyone! :)
[/quote]

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Phineas J. Whoopee
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by Phineas J. Whoopee » Wed Dec 27, 2017 4:19 pm

I wrote about market pricing mechanics in the middle of this post. It's in a thread about the Efficient Market Hypothesis, but the mechanics are the same whether or not one accepts the EMH. I hope it's helpful to you.
PJW

quantAndHold
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by quantAndHold » Wed Dec 27, 2017 4:36 pm

Basically, you're owning a tiny portion of a company. In the simplest terms, there are four things that can happen to the portion of the company you own:

1) The company starts (or continues) paying out a portion of its earnings as a dividend.
2) The company is acquired, and you are paid back for your ownership, either in cash, or with stock in the new company.
3) The company goes bankrupt, and your portion of the company is worthless.
4) You sell your portion of the company to someone else for a price you both agree on.

Basically the price is a tick by tick accounting of what all potential buyers and sellers think that the Net Present Value of those four things is equal to, with a little chaos theory thrown in for good measure.

(There are more complicated things that can happen, but from a simple perspective, they're usually variants of the 4 things.)

farnsy
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by farnsy » Wed Dec 27, 2017 4:53 pm

Derivative wrote:
Wed Dec 27, 2017 11:37 am
Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold? What determines whether stock prices go up or down? Is it solely supply and demand for the stocks? Doesn't that make all stocks extremely volatile?
Prices come from demand/supply, but the demand for stocks is not arbitrary. The price of a stock is what the people buying it believe the future payments (dividends) from that stock are worth in today's dollars. Prices change because of changes in (1) people's belief about what those payments will be or (2) people's belief about fair discount rates and the profitability of competing alternatives. Some stocks are therefore volatile while others are much less so.
Are stock prices based on any other value? Like, if you are buying a stock, you can't say you are buying a portion of the building of a company right? If stocks actually allowed you to own a portion of the building of a company, it would most certainly be less volatile as you can get your money back after you sell the building.
A stock gives you a right to a portion of the entire value of the firm, after debts and other obligations are paid off. Also gives you voting power to decide what the company does and how/when it pays out that value. Because the value of the firm (and how that value will ultimately be paid out) cannot be unambiguously computed and people's beliefs about it change over time, the price also changes over time.
Are there any kind of investment that has more intrinsic value (I am guessing only real estate) or do stocks hold some intrinsic value so that they won't fall below a certain threshold?
The value of a firm can fall as low as or lower than the value of its debts, so stock prices can and do go all the way to zero. That's the only lower bound on stock prices.

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TD2626
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by TD2626 » Wed Dec 27, 2017 5:05 pm

In theory, isn't it the case that if you own 1 share of a company with 1,000,000 shares outstanding, you own 1 millionth of the company? Thus, in the event of company liquidation, you would one millionth of whatever was left over after debts are paid off and all assets are sold. However, companies usually liquidate in duress, when insolvent (e.g. when debts are larger than assets, so shareholders get nothing). The value of most stocks, then, would come from expectations (or hopes) of uncertain future returns (e.g. dividends and capital gains).

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by WinnFlak » Wed Dec 27, 2017 5:10 pm

It's all perception. No one buys a stock hoping the price stays the same. They want it to go up (hold it) or down (short it).

Each stock is worth whatever someone thinks it will be worth in the future. That's about it.

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CyclingDuo
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by CyclingDuo » Wed Dec 27, 2017 5:43 pm

Derivative wrote:
Wed Dec 27, 2017 11:37 am
I am a newbie when it comes to how investment works. Where can I read more about the questions I am having to truly understand how stocks and the stock market works?
You've been posting here for 4 1/2 years, and your handle is "Derivative"? And yet you ask a basic question about stock prices.

:oops: :oops: :oops: :oops:

Something certainly seems askew....
"Everywhere is within walking distance if you have the time." ~ Steven Wright

farnsy
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by farnsy » Wed Dec 27, 2017 5:49 pm

WinnFlak wrote:
Wed Dec 27, 2017 5:10 pm
No one buys a stock hoping the price stays the same. They want it to go up (hold it) or down (short it).
I suppose everyone *hopes* that prices change in their favor, but certainly many people would be happy for prices to stay the same. You make money on dividends in that case. We've been in an era of low dividends for so long that it's easy to forget this.

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by Ged » Wed Dec 27, 2017 6:03 pm

Derivative wrote:
Wed Dec 27, 2017 11:37 am

Are there any kind of investment that has more intrinsic value (I am guessing only real estate) or do stocks hold some intrinsic value so that they won't fall below a certain threshold?
A stock has an intrinsic value based on the financial holdings and liabilities of the company. That value can turn out to be zero or negative if the company is bankrupt. Real estate is part of that. Intellectual property, cash on hand, accounts receivable and payable, loans, inventory etc. are also part of it.

Dissolution of large publicly held companies and payment of the proceeds to shareholders is unusual, however it does happen with smaller companies.

If a corporation goes bankrupt the stockholders do not get assessed any leftover debts after the assets of the corporation are distributed to the creditors. Some might say this protection is the main reason to form a corporation.

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by dbr » Wed Dec 27, 2017 6:24 pm

I am not sure the question as to what determines the price of a stock at any point in time has a simple answer or even any fully understood answer. But I am not a person who has exhausted the literature on the subject.

If is, of course, true that at some point the price is set when one seller and one buyer agree to exchange the stock for money at a price. But I think that explanation begs the question. Maybe even that statement is not completely true.

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by uberational44 » Wed Dec 27, 2017 6:42 pm

"In the short run, the stock market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company."
Marketeer investing as a hobby. Interested in modern takes on value investing, passive investing and general contrarianism.

quantAndHold
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by quantAndHold » Wed Dec 27, 2017 6:48 pm

TD2626 wrote:
Wed Dec 27, 2017 5:05 pm
In theory, isn't it the case that if you own 1 share of a company with 1,000,000 shares outstanding, you own 1 millionth of the company? Thus, in the event of company liquidation, you would one millionth of whatever was left over after debts are paid off and all assets are sold. However, companies usually liquidate in duress, when insolvent (e.g. when debts are larger than assets, so shareholders get nothing). The value of most stocks, then, would come from expectations (or hopes) of uncertain future returns (e.g. dividends and capital gains).
Yes, very rarely, a company that has more assets than debts will be liquidated, the debts will all be paid, and the shareholders will get the remainder paid out. It does happen. Just not often.

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by SimpleGift » Thu Dec 28, 2017 12:59 am

Derivative wrote:
Wed Dec 27, 2017 11:37 am
Are stock prices based on any other value?
The value of an income-producing asset, such as a stock, a bond or a commercial real estate property, can be calculated as the discounted present value of its future income stream. Granted, many stocks do not have current earnings or produce dividends — but any stock price above zero suggests that some investors believe it may pay out in the future, if only from the sale of its assets.

This method of asset valuation originated with Irving Fisher, I believe, an American economist whose life work was summarized in his 1930 treatise, The Theory of Interest. In a nutshell, his idea was that "capital value is income capitalized, and nothing else." If interested, William Bernstein wrote an instructive and entertaining article about Fisher's asset valuation ideas, found here.

Even more succinct, we also had a Forum topic on Bernstein's article, Classic Bernstein 5 - What's a Thing Worth?
Cordially, Todd

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by david1082b » Thu Dec 28, 2017 2:51 am

uberational44 wrote:
Wed Dec 27, 2017 6:42 pm
"In the short run, the stock market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company."
I think this is from a Morningstar page:
The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company. The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.
http://news.morningstar.com/classroom2/ ... 901&page=7

The M* page doesn't cite the source of the Graham quote though.

david1082b
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by david1082b » Thu Dec 28, 2017 3:02 am

david1082b wrote:
Thu Dec 28, 2017 2:51 am
uberational44 wrote:
Wed Dec 27, 2017 6:42 pm
"In the short run, the stock market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company."
I think this is from a Morningstar page:
The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company. The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.
http://news.morningstar.com/classroom2/ ... 901&page=7

The M* page doesn't cite the source of the Graham quote though.
Searching around, it seems that the Graham quote is not all that it seems. Another thread from years ago actually looked at what Graham published and found these direct quotes:
In other words, the market is not a weighing machine, in which the value of each issue is registered by an exact and impersonal mechanism, in accordance with its specific qualities. Rather we should say that the market is a voting machine, whereon countless individuals register choices which are partly the product of reason and partly the product of emotion.
The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers.
viewtopic.php?t=77840

No published quotes have been found about "short run voting machine, long run weighing machine". Apparently Warren Buffett claims that Graham said the original "short run/long run" quote in class: viewtopic.php?p=1106280#p1106280

dbr
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by dbr » Thu Dec 28, 2017 9:20 am

SimpleGift wrote:
Thu Dec 28, 2017 12:59 am

The value of an income-producing asset, such as a stock, a bond or a commercial real estate property, can be calculated as the discounted present value of its future income stream. Granted, many stocks do not have current earnings or produce dividends — but any stock price above zero suggests that some investors believe it may pay out in the future, if only from the sale of its assets.

I think the question is not the value of a stock but the price. I don't think there is any mechanism for setting the market price of a stock by calculation.

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by SimpleGift » Thu Dec 28, 2017 10:52 am

dbr wrote:
Thu Dec 28, 2017 9:20 am
SimpleGift wrote:
Thu Dec 28, 2017 12:59 am
The value of an income-producing asset, such as a stock, a bond or a commercial real estate property, can be calculated as the discounted present value of its future income stream. Granted, many stocks do not have current earnings or produce dividends — but any stock price above zero suggests that some investors believe it may pay out in the future, if only from the sale of its assets.
I think the question is not the value of a stock but the price. I don't think there is any mechanism for setting the market price of a stock by calculation.
Irving Fisher (and the Gordon equation) would say that the market always has a fundamental value (earnings growth and dividends) to which the market price (P/E ratio, in pink below) eventually returns, sooner or later.
Over long periods, the speculative price of the market (P/E changes, in pink) can deviate significantly from this fundamental value of dividends (in yellow) and earnings (in green) — due to speculative excesses, both positive and negative — but eventually this fundamental value of the market is recognized by the price setters.

To the OP's question, the market price is not just speculative, but is anchored by a financial value (discounted future earnings).
Cordially, Todd

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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by Sandtrap » Thu Dec 28, 2017 11:09 am

Derivative wrote:
Wed Dec 27, 2017 11:37 am
Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold? What determines whether stock prices go up or down? Is it solely supply and demand for the stocks? Doesn't that make all stocks extremely volatile?

Are stock prices based on any other value? Like, if you are buying a stock, you can't say you are buying a portion of the building of a company right? If stocks actually allowed you to own a portion of the building of a company, it would most certainly be less volatile as you can get your money back after you sell the building.

Are there any kind of investment that has more intrinsic value (I am guessing only real estate) or do stocks hold some intrinsic value so that they won't fall below a certain threshold?

I am a newbie when it comes to how investment works. Where can I read more about the questions I am having to truly understand how stocks and the stock market works?

Thank you and Happy Holidays to everyone! :)
This from google:
By knowing how to calculate the intrinsic value of investments, you can search for the best bargains in the market. Intrinsic value refers to an investor's perception of the inherent value of an asset, such as a company, stock, option, or real estate
Physical Real Estate (not REITS) have a greater "tangible" value. True, there is a perceived value that drives prices up or down regionally. But, there are measurable factors at work. Curb value. Rents in the area. Historic sales price. Tax value. Appraised value. etc. Prices change slowly compared to the "market". Yes. R/E can be over valued or under valued. But not for long. The price is what someone is willing to pay for it based on the quantifiables mentioned. You can buy a SFH. Flip it. Rent it out. Live in it. Renovate and upgrade and resell for profit. You can buy an apartment building and rent it out and retire.
The "market" is a whole nuther' thang'. Not even apples to oranges. More like apples to plywood.
j :D

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Sandtrap
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Re: Stock prices -- Are they only dependent on how much people are willing to pay and how much they are willing to hold?

Post by Sandtrap » Thu Dec 28, 2017 11:14 am

david1082b wrote:
Thu Dec 28, 2017 2:51 am

I think this is from a Morningstar page:
The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company. The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.
http://news.morningstar.com/classroom2/ ... 901&page=7

The M* page doesn't cite the source of the Graham quote though.
OP: This is similar to tangible real estate in some respects though the adjustments happen at a snails pace compared to the market. Also, there might be emotional based speculation driving prices of R/E in a regional or local upturn but, again, a lot slower change and adaptation than the "market". Flippers and speculators get burned quickly as reality check sets in.
j :D

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