hr: Money

Different stocks have different trading values on the stock market. What determines these values? A simple answer, which is perfectly true nonetheless, is supply and demand. The question is, why is the demand for some stocks high, and non existent for other stocks.

Photo Credit: RonAlmog

Since share prices can rise and fall dramatically, and for some companies, disappear altogether, this means that at some point of time, demand was high, and then suddenly fell. What is this due to? Is it just the whim of an investor, or is there something tangible behind it.

The answer lies in the middle. Shares have an intrinsic value. Like gold. The purpose of each share’s life, is to ultimately pay the investors on a regular basis. The value of each share on the stock market is therefore tied to how much the share has paid, and how much it is expected to pay in the future.

The ratio of the price of the share, to it’s earnings, is called the Price-Earnings Ratio or the P/E ratio. It isn’t an exact indicator of share price, but it certainly does influence it. Share prices are affected by perception which isn’t always logical, and hence the variation. But if you’re looking to see whether or not a share is underpriced or overpriced compared to it’s peers, you can always use the P/E ratio as a starting point.