I just saw a post that said Tesla stock is only worth 1/5 as much as it’s valued as. It doesn’t make sense to me.
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They mean that the selling/buying price doesn’t reflect the “real value” of the stock in their opinion. This is kind of esoteric because of course, the only thing that defines the price (and therefore the value) of a stock is what people are willing to pay to buy it. However, what people want when they buy a stock is not a stock that is expensive, but a stock that will return value in the future – one that is likely to retain and gain in price, not one that is just expensive right now. That means that the (hidden, “true”) value of a stock is actually determined by other factors, such as how well the company is performing or is expected to perform in the future, or things like predictions of a stock’s future value based on past changes in price.
The difference between the price of a stock and its supposed real value is thus an area where people can greatly disagree. Actually, there has to be disagreement for any such difference to exist, because if the price of a stock is a certain amount, well that means that somebody is willing to pay that amount, meaning that that somebody presumably believes that the stock is worth that amount. Others might disagree, maybe based on data, or maybe just on opinion. After all, if the real value of a stock – a value which accurately encompassed all future price changes of the stock – could be determined reliably, there would be no speculative market at all because everyone would know exactly which stocks to buy at exactly which prices. The whole game is to buy a stock that will gain in price and then sell it at the exact moment before the price will be thought to be too high. But obviously nobody would ever buy something they knew was about to drop in price. so speculation can only exist if people have incomplete information about value.
There’s a relevant idea called the “greater fool theory”. Essentially, I sell you a chicken that I claim may someday lay a golden egg. You know that this impossible, but you realize that somebody else might not think so. So you buy the chicken anyway at a highly inflated price based on the assumption that there’s a ‘greater fool’ out there who will buy it off you for more. And then maybe you do some advertising to create the impression in people that some chickens do lay golden eggs. Maybe the guy who you end up selling it to *also* secretly knows that chickens never lay golden eggs, and is just playing the same game, but either way it’s all the same to you. In highly speculative markets this sometimes seems to work – nobody thinks *they’re* the fool, they all think they’re the last smart guy in the chain who is going to profit big off the greater fool. Whether or not they actually are, this can lead to the speculative price far outstripping the actual agreed value of the thing being sold – everyone tacitly agrees what they’re doing makes no practical sense, but they also all think there’s somebody out there who doesn’t realize that.
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