The value of a stock is based on the value of the company, but why that correlation?
Only thing I can see linking them is dividend, but that is just 3-4% Annually. What is preventing it from becoming a game of share market, like happens in crypto?
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Because stocks are basically a portion of the company. The total of stocks combined represents the entirety of the company.
If your company is worth 100 dollars and has 1000 shares, each share is worth 10 cents.
If the company value goes up to 200, and you still have 1000 shares, each share is now worth 20 cents.
Companies can’t just “print out stocks”, the amount of stock is fixed (kind of) which is why the value fluctuates with the price to reflect its actual value. This is also why if you own 51% of a company’s stock, you own said company because you literally own 51% of the company.
This is why crypto is often seen as a scam, there is technically no “limit” to the amount of crypto, its tied essentially to nothing. Thus its value is driven entirely by how much people think its worth.
Enterprise valuation – the total value of the company – is defined as the sum the company’s debt (net of cash) and equity. The equity portion is what’s reflected in a stock price. The value of the equity is determined by several factors, the most important of which is the company’s ability to generate free cash flow or earnings (they’re different things), and the market’s expectation of their likelihood to *grow* (or shrink) those earnings. Other factors that influence equity value are things like intellectual property, and intangibles (like having exclusivity in a market). Dividends matter in some cases, but they aren’t usually a key factor in determining equity value.
What do you mean by “game of share?”
It often isn’t, really.
The value of stock is loosely the present value of the company + the perceived future value of the company.
For some companies, things are pretty stable, the stock price is pretty stable, and the stock price is reasonably correlated.
For others, the company may even be currently operating at a loss and the perceived future value varies a lot based on many factors like positive or negative news and CEO shenanigans.
Some investors, like Warren Buffett, have been very successful at identifying businesses where the current stock value is less than the actual value of the company, so they buy the company, replace the management, make it profitable, and generate lots of wealth.
Shares are literally equal portions of a company. Share price is the market valuation per share.
And since all cumulative shares add up to 100% of the company, the company’s market value is literally the cumulative market value of all the shares.
Company market value = total shares x current share price
Share price is initially started at IPO. If the market thinks this is overvalued (e.g. compared to similar companies), they will hold off from buying it. If current owners start selling off then there will be a crash.
> The value of a stock is based on the value of the company, but why that correlation?
Other way around.
Take the number of shares times the share price and you have the market cap of the company, which is what is often used to state the value of said company.
The share price is literally whatever somebody just paid for it, so that’s what it is worth. If people tomorrow decided to buy/sell Apple at $20 lower, then the market cap would drop by millions/billions.
Stocks don’t really correlate directly to company value. That’s a “perfect world” idea. Stock is based on the traders perception of the company’s value and what they believe it will be when their ready to sell. Essentially it is a bet that it will be x valuable tomorrow. If the company closed right now, the stock will be gone.
Crypto isn’t based on anything real so the “bet” is more difficult to predict. The currency could collapse without warning because it isn’t based on a company that has an interest in existing. Someone somewhere can literally just decide to close it out of boredom. They also have a slight interest in just taking the money and running because laws haven’t really caught up and there are massive loopholes.
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