This could be the dumbest question ever on elite trader. How do the fundamental aspects of a stock effect its price. Maybe I am missing something. As I understand it a stock's price will have to do with supply and demand. If more people want to buy it than sell it, the price will go up. If more people want to sell it than buy it, the price will go down. What else is there that can cause a stock's price to go up or down? Why is it that things like company earnings being up, could cause more people to want to buy this stock, and therefore the price would go up? Why is it desirable to buy stock in a company that is showing increased earnings or profits? Why would that even make a difference? Is this all about the dividend?! Somebody please tell me, why are you guys buying stock at all? Is it just because you think other people will also want to buy it and therefore you can sell it to them for more money?? Why should other people want to buy it?? Because you are buying it??!
How do the fundamental aspects of a stock effect its price? --------------------- If you buy a stock at $20 and it proceeds forthwith to $10, and you have not sold, this is known as the science of fundamentals and has no effect on the price because we know the book value is greater than $30 and the stock is worth holding. Book value of a stock is basically your account balance divided by your life expectancy and has no effect on the price of the stock either.
Thanks for the reply, but it is not really the answer I was looking for. It seems no one could answer this one. You said we "know" the stock is worth $30, but how do we know that? Why is a stock even worth anything? I don't understand the logic behind fundamental analysis. Buying and selling pressures on the stock are the only thing that could move its price higher or lower. So maybe fundamentals work because people just like to buy stocks in strong companies? In that case we could anticipate that the stock price would be higher because when positive earnings come out, etc , then more people would buy it. My question was more like, WHY would more people want to buy it, or is that just how it is.
What makes people want to buy a stock: The belief or fear that the price is too low and will go up (longs buying or shorts covering). What makes people want to sell a stock: The belief or fear that the price is too high and will go down (shorts or longs selling). What drives these beliefs or fears: For the most part price action is driven by news, rumors, earnings hits/misses, future earnings guidance, analyst upgrades/downgrades, sector rotations among institutional investors. Also, a high short interest can drive a stock up much farther than seems rational based on the news that initially sparked the rise.
Yes, exactly. We anticipate the behavior of the crowd and want to go with the crowd. Since the big investors want to invest in strong companies, fundamentals work as long as a change in the environment of strength doesn't occur. For example, auto parts stocks seemed to be growing to the sky during the height of recessionary fears, but as soon as cash for clunkers was announced, they fell out of favor.
In the short term, who knows why people buy stocks but over the long term, the only reason is because they think the investment will outpace inflation (hopefully by a significant margin) and if the chance to buy an investment comes that offers a good long term rate of return, then they will buy. Think of it another way. If you could buy a piece of prime real estate in the best location in, say, New York City with a bombproof tenant, say, Berkshire Hathaway and the rental agreement was set out so that the rent would rise every year by an amount greater than inflation and the contract was fixed for a minimum 50 years. And lets also say that the tenant covered all building maintenance costs etc... Furthermore, this years net rental income will be, say, $10m How much would you pay to buy that building? Depending on the inflation outlook i would probably be prepared to pay anywhere between $70m and $111m Now, if the owners were asking $200m last week and then this week asked $300m would you be interested in buying? Hopefully not But if the owner was asking $200m last week and then suddenly dropped his asking price to $60m this week, would you buy it? I think you would, because you can lock in a very safe long term return.
Not the dumbest question by a long shot. If you want a serious answer purchase a used copy of "security analysis" by Ben Graham. http://en.wikipedia.org/wiki/Benjamin_Graham http://www.amazon.com/Intelligent-Investor-Definitive-Investing-Practical/dp/0060555661
In theory corporate ownership is divided up into shares with the value of each share being some part of the total value of the enterprise. If the enterprise value goes up, the value of each share should go up accordingly. The more shares you have the more voting power you have and the greater the portion of corporate profits you're entitled to through dividends, and if you could buy all outstanding shares you'd own the company. This is only really true for private corporations now, since with large public mega-corps the number of shares outstanding and enterprise values are so large that a normal shareholder has no chance of influencing corporate action. The average shareholder is completely removed from management and the board in a modern mega-corp, even though he is in fact still an owner.
Maybe I can explain it in terms of baseball cards. Say this is a players rookie year (IPO) but people expect great things from him and some start collecting his rookie card (stock) expecting it to rise in price. Now let say he isn't living up to the hype (bad earnings reports, low or no dividends, etc.) collectors start selling off that card and the value drops. Why? Who wants to collect another deadbeat rookie card? Now next year his stats improve and he starts becoming a household name (breaking earnings expectations, high dividends, news of expanding the company) more people start wanting to buy that card so the value goes up. Trading stocks on fundamental analysis, is basically a fast paced baseball card trading game.