When you open the financial section of the newspaper, there is a section where you can see the stocks listed in the country. In that table, you can see the 52-week high and low price of the stocks listed in the country’s stock market index.
Looking at today’s Straits Times, I could see that, for example, SIA Engineering closed at $3.45 yesterday. The 52-week high price was $4.378 and the 52-week low price was $3.34. Another example, Capitaland closed at $2.26 yesterday and the 52-week high price was $2.19 and the 52-week low price was $3.93. In fact, all stocks in the world will be trading in between or at the 52-week high or low price (DUH!). How come there are such huge changes in the price within one year? How come a share of a company can be worth $4 today and $5 tomorrow? Can the value of the business such as SIA Engineering change so much within one year? The answer is the value changes extremely little as compared to the stock price. The stock price moves according to the buyers and sellers in the market (supply and demand) and the price of the stock on a particular day does not necessarily reflect the real business value. For example, during a market crash, the prices of stocks plummet like crazy but has the value of the businesses changed overnight? Certainly not.
The table below shows the differences between stocks and business:
As seen above, the value of the business can change according to the cash produced (profits) by the company. The risk is a decline in business value but this certainly doesn’t happen overnight. When investors believe that the company will do well, they buy the stock in huge chunks and push the price up and the contrary is true as well.
In conclusion, stock price is not equal to the value of the business. The value of the business does not change overnight unlike the stock price which can go up 8% in one day and drop 4% the next.
One thought on “Stock Price Fluctuation = Business Value Fluctuation?”
though the value of the business does not change overnight, the way of valuing a business does change in short period sometimes, e.g. 1997 Asian financial crisis, 2000 dot com bubble, 2008 financial crisis. PE, PB attached could change drastically over a short period due to tight liquidity and gloomy prospects. If I did not remember wrongly, Cisco has been earning much more than what it earned in & before 2000, even after it has issued large quantity of options, but its price is far from its price in 2000.