Price and the Valuation of Shares

Submitted by Marco Palmero on 22 February, 2010 - 18:24

Price and the Valuation of Shares

Everyone can find out the price of shares by looking at the live ticker on your stock trading charts. But the price of shares aren’t set in stone. Stock prices are always in a state of flux, moving up and down at the mercy of the constant pull and push of supply and demand between buyers and sellers. How about the valuation of shares? The value of shares depends on who is looking at the stock. It’s all about perspective: where there is a buyer, there is always a seller and a trade is made when an agreement in price is completed. The seller may have other reasons, but let’s assume they see the stock has exhausted its upward trend, and they are selling to realise their profit: while the buyer sees potential value in an increasing stock price.

What method do you use to assess the value of shares? The market doesn’t employ a valuation method at all – it moves at the whim of the market. Does the share price fluctuations ever make sense to you? How can the share price of Commonwealth Bank more than halve from $62 to $24 then jump 140 percent from $24 to $58 in January? Did the real company value fall and then jump that much in a month? How can that happen?

when you participate in the market you are one of three things: a trader, an investor or a loser

There is always going to be a mismatch between the price and the valuation of the shares. And when you participate in the market you are one of three things: a trader, an investor or a loser. A share trader jumps into the trade (either long or short) to take advantage of this mismatch of price and the value of the company on the stockmarket (or they could be executing their trading system base don other factors). A stockmarket investor buys into a position, optimally when the company is valued cheaply, and waits in the long term for the value to surface. A loser simply doesn’t know who they are and are probably jumping into the markets because of a hot tip.

So understand that as there will always be a mismatch in the share price and the valuation of shares. The important part to remember is to know if you are in the markets as a trader (where a skill set of trading with discipline complete with trading rules is required) or if you are participating in the market as a share investor who must keep track of the share valuation.