Question

Learning Objective: Discuss financial management concepts. Topic: Explain the distinction between a stock’s price and its...

Learning Objective:

Discuss financial management concepts.

Topic:

Explain the distinction between a stock’s price and its intrinsic value. Why is there a difference? How do stock traders decide how much to pay for a stock? What factors do you think should go into their decision on price?

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Answer #1

Stock price refers to the available current market price of stock at which trading is taking place while intrinsic value is the while intrinsic value is a measure of value based on the future earnings a company is expected to generate for its investors. Intrinsic value includes the expected earning of the company while market price includes demand and supply of the stock in the market. Investors prefer to invest in stocks on the basis of intrinsic value of stock while speculators prefer to investment on the basis of market prices. investors decide on the basis of intrinsic value that whether the stock is overvalue or udervalued and accordingly they take investment decision.

Factors like past price behavior, effect of economic affairs on stock price, news related to stock are some factors that should be considered when go into decision on price.

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