Market Value of Publicly Held Shares
The market value of a publicly traded stock depends on many factors. Successful investors make their decisions about fair-market value by considering price to earnings ratio (P/E), the corporation's strategic position in the market, the perceived effectiveness of corporate management, the strength of corporate vision, the general market trend in that corporation's product, research or service area, and how well the corporation does in relation to its competitors. Above all else, the market value, its share price, equals what investors will pay for it.
Other People Are Reading
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Value Investing
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Some investors pay close attention to a stock's price to earnings ratio (P/E). Historically, U.S. stock market share prices have hovered around 15 times annual earnings. From this perspective, if a corporation earns a dollar per share, and its stock sells for $15, the stock price represents fair value. Value investors, like Warren Buffett, who emphasize P/E ratio, have enjoyed considerable success.
Market Dominance
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When investors perceive that a corporation dominates a market, they will pay more for that corporation's stock. For years, Microsoft dominated the PC market. Investors ran up the stock price. Microsoft no longer dominates the market, which has expanded into Internet-based cloud computing, smart phones and video games. As of June 2010, Microsoft's P/E has declined to a little above 11. ("Cloud computing" uses the power of the Internet in conjunction with Internet-based software, rather than programs residing on the user's PC.)
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Steve Jobs' Vision
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Investors pay more when they believe in a corporate strategy and in leadership's corporate vision. When Steve Jobs returned to Apple in 1998, shares sold for around $17, and had a negative P/E. As of June 2010, a share sells for $240, with a P/E around 30. Jobs revitalized the company by moving forward into areas where no computer hardware company had gone before: music and video downloads, smart phones, online book sales and tablet computers.
'Better Lucky Than Good'
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Facebook began as a part-time college-student enterprise. Google began as a graduate student research project. Eventually, the vision and capabilities of the men who started these companies led these enterprises forward. But they also benefited from having a good idea at a time when consumers began spending more time on the Internet. As investors began to understand this fortunate alignment between the direction taken by these companies and worldwide consumer desire, share prices rose dramatically.
Weakening the Competition
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A company that runs more efficiently at lower cost, or that in any other way consistently outperforms its competitors, puts them at a costly disadvantage. As its competitors weaken, the more efficient company grows stronger. Because Wal-Mart buys in greater volume than its competitors, it pays less. Rather than using this advantage to increase profit margins, Wal-Mart accepts lower profit margins to sell products at prices below competitors' costs. As competitors' market shares diminish, Wal-Mart's market share expands further. All through the severe recession of 2007, Wal-Mart remained profitable, and maintained its share price in a falling market.
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