The Stock Market-A Form of Democracy
November 19, 2020
The stock market is a form of democracy. Everyone gets a vote to decide the value given to a stock, writes Peter Watson.
A popular question among investors is what determines the value of the stock. The simple answer is you and other market participants.
Every time a stock is traded, the buyer and seller independently agree on the price they are willing to complete the transaction. Both parties have to agree or there’s no trade.
Buyers and sellers have an idea of the future earnings of those shares and they decide on their required return on investment. That determines their estimate of the value.
Assume there are two companies that are expected to have the same earning power in the future. Are the prices of those companies’ shares equal?
The two important variables that determine price are the expected future earnings and the level of risk taken on by owning those shares.
Sometimes daily news events cause stock prices to plummet.
In most cases, the long-term expected profit is unchanged. What has changed is an investors perception there is more risk and therefore they will offer less for that stock.
My recommendation is to invest for the long term.
Own stocks that have good prospects for ongoing future earnings. Ignore the daily news that does not directly affect the ability of the company to continue to earn profits.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.