What is the underlying/most important/fundamental variable of the price of a stock?

Question

I would think when you strip all the news and speculation down, the lowest a stock price could be is if you sold the company today divided by the number of share holders, right?

What is the basic fundamental of a stock price?

Answer 1

the basic variable for price is supply & demand. The more people want it, the more it costs. & the reverse is true also.

What you are talking about is a fire sale, that only accounts for the physical assets of the company. What about long term growth, yeild, market flux, earnings? All that plays into how many people want it & at what price.

In a bankruptcy situation, after liquidation, the stockholders are the last on the list of payees. They (we, as it has happend to me when Kmart went bankrupt a few years ago) usually get nothing but the tax write-off.

Answer 2

Rarely do stocks sell for what they are worth today. The stock price is determined by demand for the shares, which in turn is affected by a number of factors - some mathematical, some psychological - indicating which way the stock price is likely to move in the future. Anyone with the proper analytical tools on hand can calculate what a share of the company's stock is worth right now, but that person would be willing to pay more if he sees a higher value for that share in the future; in other words, there will be a demand for the share, even as it sells at more than its current value.

Answer 3

Not necessarily. If you sold the company today, debtors would be the first to get money from the company, then any remaining capital can be divided by the number of shares. However, the most important variable of the price of a stock is determined by the value of its future cash flows, and how it compares to the price of the stock at the time you are going to make the purchase of such stock.

Answer 4

I think that is right. If the company went bankrupt and sold assets to cover debtors, the remainder would be left for stockholders. Therefore, it would be the predicted sale value of the remaining assets divided by shareholders. That is the minimum price of a stock.

Now, that is not the basic fundamental of a stock price in terms of a company that produces revenues. The stock price would be based on the present value of projected earnings (earnings, EBITDA, etc), sales, or other projected stream of money the company could produce.

Answer 5

Researchers have concluded from many studies that the P/E and BV/MV plays an important role in determing stock prices. Obviously, these ratio doesn't predict future outcome, otherwise all we need to do is write a computer program to predict the future; it does provide glimpse into whether or not you are buying a expensive or inexpensive stock in comparison to market sentiments. See http://ibooyah.com for more ways to evaluate stocks.

Answer 6

Return on Asset or ROA is the most important fundamental so it is also called the 'acid test ratio' which is the Gross Income/Assets.