Market Value Not Equal to Actual Value

A small loan can help you if you are short of cash until your next payday, but if you invest in the stock market and follow the crowd in their buying and selling habits, you may end up with many more liabilities than assets. Why? Have you noticed how much the stock market fluctuates in a day, and also the ups and downs of prices? Does that mean that the companies’ values goes up and down as much as the share price, or does that mean that there may be some other force at work here? As you will see, the market value of the share does not equal actual value of the same share in terms of a company’s value.

Market Price Based on Emotions, Not Logic

One of the pioneers in value investing, Benjamin Graham, believed that many people rely too much on their emotions when investing rather than their logic. This explains the fluctuations of the market, and also why a lot of people think it’s risky to invest in it. What makes it risky is the constant buying and selling that goes on day after day, hour after hour. Constant trading drives share prices up and down, and also creates a lot of the risk.

Ben Graham, in his book “The Intelligent Investor” suggests that building wealth from the stock market necessitates using a “dollar cost averaging” technique, to always buy more shares at lower prices over time. As inflation, along with value of companies, grow over time, investments will be worth more in the long run. It’s also called “buy low and sell high” which you might have heard about. Unfortunately, most people tend to bring their emotions into their investing, and will panic and sell when the price is going down, because they are afraid to lose any more money on their investments, leaving them open to take out a small loan to survive.

Beyond the Smoke and Mirrors

The stock market is riddled with confusing terms, acronyms and policies, making it very difficult for the average investor to understand. It’s mostly smoke and mirrors to keep customers oblivious and dependent on brokers, that get a lot of money, to do the investing for them. But if you take a look behind the scenes, you’d see what’s confusing you is what could be referred to as BS.

Inflated Price? Inflated Value!

Brokers and fund managers will buy or sell enough shares to drive price up or down, depending on where the price is trending, to control the market. Maybe it’s because a company got some bad news, or even good news, and investors are trying to position themselves to either make or avoid losing a lot of money. This tends to skew the value of a share price, and unbalances the market. Therefore, if a share price is going up too high, brokers or fund managers will sell several million shares to drive the price back down. Similarly, if a share price is dropping too fast, they’ll buy as many shares to even up. So, if you see share prices inflated, don’t make the mistake of thinking it is worth that much. They may not be worth much more than fool’s gold!

P/E Ratio Tells it All

There is a very simple way to determine if a certain share price is on target or not—look at the Price per Earnings ratio. This is a method of valuation that takes the current share price on the market, divided by per-share earnings over a period of time, for arguments’ sake, a year. If the price of shares in a company are $ 24 per share, and the earnings over the previous year were $ 2, the ratio of P/E is 12. Generally, the higher the P/E ratio, the higher the expectations of investors for company growth. This means that you will be able to see higher earnings within the next year with this company. However, the lower the ratio, the slower the growth regardless of what the market is doing.

Buy Low, Sell High

When you can learn how to find the correct value of a company or share, you will know when the share price is at its lowest, and when you can buy. After the share price tops out, you can sell your shares and pocket the difference without needing a small loan. If this is the track you take, you could make money in the stock market while others are losing.