What Determines a Stock Price?

INC VALUATION WHAT $$$$ DETERMINES DEMAND A STOCK PRICE PRICE SUPPLY WHAT DOES STOCK PRICE TELL US DEMAND PRICE T $10 SUPPLY $50 10,000 SHARES PRICE A 1000 SEARES Price movement of a stock is caused The price of a stock reflects the growth by supply and demand in the market. that investors expect in the future. Comparing just the share price of two companies is COMPANY VALUE meaningless. It's important not to equate a company's value with the stock price. For example: a company that trades at $10 per STOCK PRICE share and has 10,000 shares outstanding has a lesser value than a company that Thevalue of a company, also called as market capitalization, is determined by: trades at $50 that has STOCK PRICE X NUMBER OF SHARES OUT STANDING 1,000 shares outstanding. WHAT AFFECTS THE PRICE OF A STOCK SUPPLY AND DEMAND Supply and demand in the market determine stock price DEMAND SUPPLY DEMAND = PRICE PRICE If more people want to buy (demand) If more people want to sell a stock Demand is determined by investor's than sell (supply), the shortage drives than buy, surplus drives present and future valuation. the price up. the price down. EARNINGS VALUATION Earnings are the major driving force affecting investor's valuation of a company Inaddition to earnings, investor's sentiments, attitudes and expectations ultimately affect stock prices EARNINGS REPORT Analysts use valuation methods to predict future market prices Earrings - Profit to profit from price movement. Earnings are the profit a company makes without which no company can survive long term Stocks that are deemed VALUE O undervalued (with PRICE O respect to their BUY theoretical value) are purchased. Companies are required to report their earnings quarterly Stocks that are deemed PRICE overvalued are sold, with the expectation VALUE O thatundervalued stocks Investors base their future will, on the whole, rise in value of a company on value, while overvalued SELL earnings projections stocks will, on the whole, fall. HOW DO INVESTORS VALUE STOCKS There are 4 basic factors HOW ITS WHAT IT WHAT SHOULD WHAT DOES THE FACTOR CALCULATED REPRESENTS BE ITS VALUE VALUE INDICATE OVALUE PRICE = $$$$$$$$ SHARE PRICE 1 P/B RATIO A lower P/B ratio BOOK VALUE OF A SHARE Value of the company if it is torn up and sold today. PRICE TO BOOK RATIO LOW could mean that the stock is undervalued. FUTURE PRESENT SHARE PRICE 2 P/E RATIO = How much investors High P/Es is a sign that investors expect higher earnings growth in the future. EARNINGS PER HIGH are willing to pay per dollar of earnings. PRICE TO EARNINGS SHARE RATIO INVEST MENT RETURN P/E RATIO 3 PEG RATIO = ANNUAL GROW TH Stock'svalue while LOW A lower PEG PRICE TO EARNINGS TO taking the company's earnings growth into account. implies you are paying less for future RATE GROWTH RA TIO earnings growth. TODAY ANNUAL DIVIDEND YESTERDAY DIVIDEND PER SHARE How much cash flow you are getting for each dollar invested. YIELD High and stable dividend yield results in a paycheck even when prices drop. HIGH SHARE PRICE CONCLUSION The only thing we do know for sure is that stocks are volatile and prices can change in price rapidly. Stock price fluctuations are dictated by supply and demand in the market, which reflect P/B RATIO investor's: V P/E RATIO >> SENTIMENTS PEG RATIO >> EVALUATION OF THE PRESENT V DIVIDEND YIELD AND FUTURE VALUE OF A STOCK No single valuation method can stand alone as a measure of a stock's value. Using a combination of valuation methods provides investors with ways of looking at the real value of a stock. +There are many theories that try to explain the way stock prices move the way they do; no single theory explains everything. TIM TIMOTHYSYKES.COM HTTP://www.FORBES.COM/2009/04/14/INVESTING-STOCKS-MONEYBUILDER-PERSONAL-FINANCE-VALUE.HTML HTTP://www.INVESTOPEDIA.COM/ARTICLES/FUNDAMENTAL-ANALYSIS/09/ELEMENTS-STOCK-VALUE.ASP HTTP://www.INVESTOPEDIA.COM/UNIVERSITY/STOCKS/STOCKS4.ASP HTTP://EN.WIKIPEDIA.ORG/WIKI/STOCK_VALUATION