Stock’s Share Price Relevance: What Are the Implications Of A Relatively Low Stock Price To A Relatively High Stock Price

By Mercy Grace Nadayag on August 16, 2012 in Stock Market

On behalf of the long-term depositor, a stock’s price is the potential for development, payments and so on. It answers the question: What would you pay today to benefit from the future earnings and related growth in share value?

This takes us to the answer to the question about what the value per share tells investors. During the regular buying and selling of the daily market, a stock’s per share price tells you where buyers and sellers settle.

This is a simple explanation of a complicated process that can see this balance recalculated many times each minute the stock exchange is open. For example, if the price of a stock is $25 per share this tells you that there are buyers willing to pay $25 per share and sellers will to sell for $25 per share. For people who trade stocks that are frequently buy and sell in an attempt to profit from price changes, there is little concern about long-term prospects for a stock.

When the stock market is especially volatile, investors can become very nervous. A sharp rise or drop in the stock market will often lift or lower prices for most stocks. This effort can be a likeness of the market’s concern about current events or future economic conditions that may hinder or help business. They are attentive on the supply and demand balance and attempt to anticipate ups and downs that may cause prices increase or decrease.

However, the odds are very high that the spooked investor will sell low and buy high – not a winning strategy. The classic mistake long-term investors make is to panic following a sharp drop in price and sell. Before, when the stock market rebounds, they buy back now.

In between those two events, long-term investors should ignore daily stock prices. There is a market saying that long-term investors should only care about the daily price of a stock on the day they buy and the day they trade.

The qualifier for this saying is it applies only under certain conditions

1. If you need to cash out of a stock as part of a financial plan (retirement, college expenses, and so on), you should pay attention to the daily price changes and plot your exit well in advance. This is why you need a five-year window, to give you the time to pick your exit rather than waiting until the last minute and taking whatever the market gives you for a price.

2. If you don’t need to trade (to pay for retirement expenses, for example) for five or extra years.

3. If your stock is experiencing sharp swings, but the stock market is not, you may want to re-look at the stock to see if anything has basically changed with the company or its market.

4. If the total market is increasing or decreasing, a stock’s price will likely go along with the tide even if there is nothing that suggests any problem with the industry.

Long-term investors should not be upset by daily price changes, but they should not be blind to changes in a stock’s price that suggests the business has basically changed and may not bid the future profits you anticipated.