fundamental value of stocks/elite trader's dumbest question

Not a dumb question,but you should look at a fundamental primer and understand things such as PE ratio's,PE/Growth,Price Book,Price to Cash Flow and other fun things like Price to sales and margin ratios..

You should also step back for a second and think of any business that you may have ever started or been interested in.Keep it rel simple...

As an example,if a restaraunt was generating $100,000 of earnings per year,who much would you pay for it??What return would you find acceptable for the risk?? I think its safte assume you would pay $300,000..Lets say they franchised without taking on sizeable debt,and earnings doubled..How much would you now pay for that revenue stream?? Could you see further expansion possibilities,or is it a one trick pony..If you spend some time exercising your mind,you will intuitively place your own price earnings multiple on the company which may differ from the markets..

IMHO,99% of the traders here focus way too much on "technicals"..





Quote from satori69:

This could be the dumbest question ever on elite trader.

How do the fundamental aspects of a stock effect its price.

Maybe I am missing something. As I understand it a stock's price will have to do with supply and demand. If more people want to buy it than sell it, the price will go up. If more people want to sell it than buy it, the price will go down.
What else is there that can cause a stock's price to go up or down?

Why is it that things like company earnings being up, could cause more people to want to buy this stock, and therefore the price would go up?

Why is it desirable to buy stock in a company that is showing increased earnings or profits? Why would that even make a difference? Is this all about the dividend?!

Somebody please tell me, why are you guys buying stock at all? Is it just because you think other people will also want to buy it and therefore you can sell it to them for more money?? Why should other people want to buy it?? Because you are buying it??!
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Quote from taowave:

IMHO,99% of the traders here focus way too much on "technicals"..
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That's because we're traders, not investors (except when our trades go bad, then we're investors) :p
 
'the present value of future earnings' really only makes sense if the stock delivers dividends

without dividends, investing in equities depends entirely on 'the greater fool' showing up at a later date to justify your risk
 
Quote from mgabriel01:

'the present value of future earnings' really only makes sense if the stock delivers dividends

without dividends, investing in equities depends entirely on 'the greater fool' showing up at a later date to justify your risk
More...

This is simply not true. Here is an example to illustrate:

A stock has a BV/Share of $100, and the shares are trading at $100. All assets are cash and the company has zero debt. Now assume, as you said, it pays zero dividends. If this company earns more than the investor's cost of capital, it is a good buy.

Why?

Because BV/Share will rise as earnings are accumulated year after year. The stock need not even trade - it may get de-listed for all the investor cares. It is still a profitable long-term holding. At some point, if the shareholders cannot sell their shares at book value, they can liquidate the company and realize BV/share directly.

No dividends, and no need for a 'greater fool.' This is what Warren Buffet means when he says that after he buys a stock he doesn't care if it trades on an exchange after that - he knows the value is going up regardless of where it might trade.
 
Why do people buy on fundamentals?

Because theoretically, a stock is a piece of a business. Ideally that business is worth something. i.e. it has assets, cashflow, etc. etc. Therefore theoretically that stock is worth a certain percentage of that businesses assets cashflow etc. etc.

People buy and sell on fundamentals because they are buying part of a business which fluctuates in value due to the actions of that businesses employees etc..

People trade on technicals because they are reading what other people think the value of that business is and reacting to those historical judgements of value as played out in the market place.

It's just different ways of valuing the same piece of a business.
 
So you are implying that discount cash flow models dont exist??

I would think twice about that one..

Secondly,what does how a company chooses to distribute earnings vs reinvest have to do with valuation models??



Quote from mgabriel01:

'the present value of future earnings' really only makes sense if the stock delivers dividends

without dividends, investing in equities depends entirely on 'the greater fool' showing up at a later date to justify your risk
More...
 
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