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Why do the price of shares of a corporation fluctuate?

Shouldn't the price of a share be a mathematical equation? Without getting too complicated with the accounts that are within equity, why isn't the value of a company's shares Assets less Liabilities and Retained Earnings? Makes too much sense to me. That would make the stock market less of a doomsday device and place a greater importance on financial statements. (Disclaimer: I believe there should be greater weight placed on FS not only because I am a CPA, but because I believe FS are what should drive a company. Currently, EPS is basically pointless with the current market structure and volatility but gets all the attention.)

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August 2016


The best way to answer this is: perceived future value. There are fundamental analysts that will tell you all the balance sheet and cash flow items are important and they are right, for the most part. That is a good assessment of the company's viability, but how investors and the market value a stock is what they think the value will be in the future. That's why there are low and high valuations. It is a subjective assessment after you look at the company's bottom line. Trends and other ancillary items play into the equation as well (interest rates).

Now with all that said, that's the secondary market and the market most people know. The IPO market is more inline with earnings and balance sheet items, but also a future value component, but more weighted on the former.

Hope that helps.


December 2015