What determines stock prices?
In the short run, the market is a voting machine–reflecting a voter-registration test that requires only money, not intelligence or emotional stability–but in the long run, the market is a weighing machine.” Share prices track the profits of a business in the long run whereas in the short run they are determined by market sentiment and demand for the shares. Hence share prices are predictable with a higher degree of certainty in the long run whereas in the short run these are very whimsical. Which is why the strategy for a trader who hopes to benefit from short-term prices has to be different from that of an investor who expects to benefit from long-term prices.
The single most critical component determining a companys stock price is its operating performance, but that is just one of many factors, and most of these other factors are beyond managements direct control. External factors influencing prices have often been dismissed as the concern of investors and academics, but the dramatic increase in stock options as a compensation vehicle has created a problem that has become too big to ignore : Billions of dollars of incentive compensation payouts are determined based on factors unrelated to management performance. The biggest external factor affecting a companys share price is whether the overall market is going up or down. These trends reflect changes to the markets implicit discount rate, or cost of capital. When the cost of capital falls, the market advances, and vice versa. Empirical evidence from the past fifty years shows that the markets implicit discount is a greater source of variation for the S&P 500 than the underlying operating pe
——————————————————————————– Answer “In the short run, the market is a voting machine–reflecting a voter-registration test that requires only money, not intelligence or emotional stability–but in the long run, the market is a weighing machine.” –Benjamin Graham Share prices track the profits of a business in the long run whereas in the short run they are determined by market sentiment and demand for the shares. Hence share prices are predictable with a higher degree of certainty in the long run whereas in the short run these are very whimsical. Which is why the strategy for a trader who hopes to benefit from short-term prices has to be different from that of an investor who expects to benefit from long-term prices.
