Differences Between the Price and the Value of a Stock

Stock prices involve fundamental and technical features.

Price and value in stock trading represent two important and distinct investment themes. While the price of a stock is measured by the last quote at which it traded, the worth of a stock is determined by recent history and what investor expectations are for how the stock will perform under new challenges in future years. Stocks having the ability to increase market share and maintain or increase prices may represent attractive value even at a time when the stock is reaching all-time highs.

Price Is Measurable

Current stock prices reflect the historical strength of a stock to consistently increase earnings, market share, assets and intangible brand value. Current stock prices generally assume the current trend of strength (or weakness) will extend into the future. Because stock prices are also affected by other markets, notably bond and commodity markets, investors need to consider the effects on price when interest rate and commodity price trends change in the future. The price of a stock reflects the desirability of owning stocks in general and specifically the attractiveness of a specific company. An example of such long-term price change is the desirability to own manufacturing or agricultural stocks. Agricultural stocks thrive when commodity prices rise; manufacturing stocks improve when demand is strong but inflation is moderate.

Stock Worth is a Value Judgment

The worth of a stock can be measured in several ways. Stocks with good balance sheets in a strong economy with low inflation can be expected to continue on their historical growth trend. This may encourage investors to invest in stocks and absorb greater risk rather than accept the lower returns of investment quality bonds. Stock worth can also be measured by comparing the dividend policy to that of bonds. Bonds with a steady dividend growth rate that rivals bond rates give investors confidence that at a minimum the cash return of the investment will rival that of a bond and still have the potential for capital gains upside.

Investment Considerations

Stock prices can be quickly quoted and downloaded. Investors can see how price varies throughout the day, even if the company has released no new announcements. This indicates that often the factors affecting a stock price are outside the realm of the company itself. However, investors should consider that stock values tend to be long term in nature. Stock values represent an investor's best guess about any particular company's future in a complex financial world that offers many alternative investments including real estate, commodities and bonds.

When Price and Value Coincide

Market professionals say that a stock is "fully valued" if a company stock is trading at such a price that there is little consideration of how negative or unexpected news might affect the company. The full value of a stock is not based on the quality of a balance sheet but the company's ability to increase its cash flow faster than has historically been possible without increasing market risk through debt or new product innovation. At this point, price and value coincide. The stock is not trading in excess of full value; nor is it oversold and expensive or undersold and cheap.

References

• FP Trading Post; The Difference Between Equity Prices and Value; Jonathan Rattner; Nov. 8, 2008

Resources

• NYSE Euronext: Glossary