What is the actual equation for determining stock prices?
Posted by admin in Finance Thursday, 21 April 2011 10:02 3 Comments
is there really a formula for setting stock prices and what are the variables? Is it supply, demand and volume? if anyone knows that would be great.
so there has to be a formula showing the supply and demand for the stock. right?
There is no formula. There is no “correct” price for a given stock. It is the markets – supply and demand. Not a hard concept, really.
Not only is there no formula but in fact stock price can be determined by the psychology of the market – not facts. Scary isn’t it?
In principle, the value of a share of stock is the present value of the dividends and share price based upon the investor’s required rate of return. A very rudimentary model exists based on this idea. There are other models used to determine the fair value of a share of stock. However, mathematics are not the foundation of the stock market, so mathematical models are only so reliable. The behavior of investors cannot be predicted mathematically.
Also, you should keep in mind that the variables involved in the valuation of stock are not set in stone. There are a wide variety of variables affecting the price of stock. Investors have different perceptions of these variables. For example, some investors, like Warren Buffett, attach a lot of importance to the level of debt that a company has and look for companies with little or no debt, but other investors do not mind companies with debt if the company is profitable.