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What moves share prices? - Views on News from Equitymaster
 
 
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  • Mar 19, 2009

    What moves share prices?

    The prices of stocks constantly fluctuate as buyers and sellers haggle towards a mutually agreeable price to buy or sell at any point of time. But can it be that the fundamental worth of each of those companies is actually changing every minute? And is that fundamental worth the only thing that determines the changes in the prices of stocks?

    Well, the prices or the quotes on each stock that you regularly get are there in black in white for everyone to see. There's no ambiguity on that. However, the factors that actually cause those continuous movements are hardly ever given enough thought. A discussion as such can throw up some interesting observations.

    And who better to turn to than Benjamin Graham, fondly called the father of value investing. As always, his uncanny knack of throwing light on the most esoteric of subjects related to stocks can be of great help.

    Graham asserted that the influence of purely objective analytical factors on the price of a stock is both partial and indirect. Said to be partial because it frequently competes with other purely speculative factors which influence the price in the opposite direction. And indirect because it acts through the intermediary of a person's sentiments and decisions.

    Let's get into a little more detail.

    One set of factors that have an influencing effect are 'intrinsic value factors'. Graham's definition of intrinsic value is that value which is justified by the facts. Thus, these factors would include things like earnings, dividends, assets, capital structure, terms of the security etc.

    Another set of influencing factors are 'future value factors'. These include things like management and reputation of a company, competitive conditions and prospects, possible and probable changes in sales, margins etc.

    A third set of factors are solely 'market factors'; technical, manipulative and psychological.

    Out of these three, only intrinsic value factors can be called purely objective and investment oriented. Future value factors are both investment oriented and speculative to some extent as they are more open to subjective interpretation. The third set of factors, market factors, is purely speculative. It is all of these together that determine the attitude of the masses towards the stock of a company. This attitude in turn leads to various bids and offers put in by buyers and sellers on the stock exchange, which ultimately leads to the market price.

    In light of all this, it is no wonder that Graham was of the opinion that the market, at least in the short term, is not a weighing machine, on which the value of each share is recorded by an exact and impersonal mechanism, in line with its specific qualities. Rather the market is a voting machine, wherein countless people register choices which are the product partly of reason and partly of emotion.

     

     

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