What IS a share of stock in a business ? What is a business ?
We know what a business is, it’s an ongoing commercial enterprise, rings up sales and pays its expenses. What’s it worth ?
You gotta look at its books and understand its operations to know.
A share of stock is part ownership in such a business.
Now think carefully...
How in the world can shares of stock be traded like commodities, like pork bellies or copper or wheat ?
With commodities, the trader has perfect information on the underlying asset - the copper, the wheat, etc.
What are you buying - A BUSHEL OF WHEAT !
Now with shares of stock in publicly-traded companies...
what does the trader know about the real value of the underlying asset - the shares of ownership in the business ?
Does the trader know the real value of the business ?
Hint: he has not got a clue about it.
Why ?
Only the officers of the company can POSSIBLY know what’s really going on in that business.
The trader may not care about the real valuation of the business. They are traders after all, and not long term holders of the stock.
But it is possible to calculate the valuation of a business for purposes of establishing a company's intrinsic value as an investment. In fact, there is no shortage of investment services or industry analysts who do this type of thing. Their assessments are readily available. Unfortunately, they don't universally agree on those valuations because of the underlying assumptions to the valuation models that are usually based on a discounted cash flow analysis. In the final analysis its all about a company's ability to generate future earnings and there is also no shortage of such historical information or projections.
From a mathematical perspective it is possible to determine what a company is worth (i.e., its intrinsic value). But lots of things, including the quality of company management, go into assessing a company's future ability to grow its earnings and/or pay a reliable stream of dividends.
Its a fascinating area to study.
what does the trader know about the real value of the underlying asset - the shares of ownership in the business ?
Does the trader know the real value of the business ?
Close, they only know when quarterly reports are issued, all others are pure speculation,rigging the game.