# What makes a stock price rise in value?



## nev25 (12 January 2013)

Complete newbie question 
I have asked similar questions on other forums with a reply go read a book and stop being a pest 
I can only assume they did not know

So here goes  

What makes stock price rise in value 
I know people buy them and assume bit more than they are worth 
So my question is why ???

Why buy something for more than What its worth


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## springhill (12 January 2013)

*Re: A complete newbie beginners question*



nev25 said:


> Complete newbie question
> I have asked similar questions on other forums with a reply go read a book and stop being a pest
> I can only assume they did not know
> 
> ...




Simple.

The purchaser thinks rightly/or wrongly the share price will increase, or they can attain value from that stock via dividends.

The other reason is to purchase a stock with the assumption of declining value. This makes you an idiot or a tax dodger.


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## CanOz (12 January 2013)

*Re: A complete newbie beginners question*



nev25 said:


> Complete newbie question
> I have asked similar questions on other forums with a reply go read a book and stop being a pest
> I can only assume they did not know
> 
> ...




How do you know what its true value is? Is all the information on the value reflected in the current price? 

The market's job is to discover what the value is, like an auction...the value is what the buyer is willing to pay for it...Think of it like a car auction. The seller wants a price as high as possible. Perhaps the buyer thinks that the stock will be in high demand later, and wants to buy now for fear of missing out on this price. Perhaps the seller wants to sell as they feel the price is fair and above what they paid.

Fundamental value investors buy because their analysis tells them that the is undervalued. 

Technical traders buy because their analysis tells them the price could rise further.

Why do you pay the price you do for things in the supermarket, do you know that they are priced at a fair value?

'food' for thought...

CanOz


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## Bill M (12 January 2013)

*Re: A complete newbie beginners question*



nev25 said:


> So here goes
> 
> What makes stock price rise in value
> I know people buy them and assume bit more than they are worth
> ...




Similar to springhills answer, the dividends are good and with the prospects of further dividend increases year after year (with some stocks, not all) makes it a good investment. To buy something today with a 6% fully franked dividend with the believe it will be 7% next year seems to me a good bet. People want this and as the dividend increases the stock price rises. Sure beats putting your cash on deposit for 4% and having to pay tax on it.


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## pixel (12 January 2013)

*Re: A complete newbie beginners question*

What makes a share price rise?
or better ask "What causes the price of anything to change over time?"

Answer: Different opinions and interests of buyers and sellers.

Look at a chart of a stock in suspension: Nothing moves because it isn't traded.




But even if there are some trades, buyers and sellers may be in agreement by and large, trading the share essentially at the same price - give or take a few exceptions:




Which gets us to the obvious point where there are large numbers of buyers and sellers, each of whom has a slightly different view and reason to start, increase, decrease, or relinquish a holding in a particular company. For an example, any stock's chart will do, as long as it's being traded at a reasonable volume. I just happen to look at BDR:




Take the dip preceding the two green candles on September 27 and 28:
One holder might have decided it's time to pull some cash out; any reason will do: 

upcoming school fees
upcoming anniversary (or worse: forgot the one last weekend and needs a "late delivery" excuse)
read about another, more promising, investment opportunity
This seller offers some at 96c; another one, in a similar situation, undercuts by offering 95c.

Two days later, another would-be investor comes across BDR. Let's say he has just sold another share and looks for an opportunity to buy something new. He sees BDR has been sold down to 87c, so he buys up to 88 and then some more at 88 and 89 because the sellers - sensing buying interest returning - are no longer willing to accept any less.  And before you know it, you have a Price Dynamic that has nothing to do with the "fair" value of the company and everything to do with differing interests and mindsets of buyers and sellers. The company itself is still the same; its financial position hasn't changed; its future outlook hasn't changed. Only Market Perception. Oh - and news of an oil discovery, or a dry hole, or a new contract being rewarded will change market perception quite suddenly.

Who is right? Who is wrong? Answer: Nobody is either. The price simply is what it is: *At any moment n time, the share is worth exactly what the last buyer was willing to pay, the last seller willing to accept for it.* And since "La donna e mobile", Ms Marquette is allowed to change her mind at any minute.

(Of course, there is yet a different scenario: If I hold a large position and want more, but pay as little as possible for the next lump of BDR, I might sell a few, giving the impression the price is going to drop. 5 or 10c lower, when I find sellers won't come any lower, I buy back all the ones I sold earlier, and then some. If done on a sufficiently large scale, that behaviour is sometimes called "Manipulation". Of course, that's unethical, illegal even, and therefore never really happening. As certain as the Earth is flat and the playing field always level.  )


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## tech/a (12 January 2013)

*Re: A complete newbie beginners question*

Answer is simple.

Peoples opinion of WORTH is and always will be
Different.
Your bargain will be my over valued.
My overvalued will be your bargain.

Those involved are so sure they are
Right they put their money where 
Their mouth is.

Few are right consistently.


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## burglar (12 January 2013)

*Re: A complete newbie beginners question*



pixel said:


> ... or a dry hole, ...  )




Hi pixel,
A wonderful post, elegantly phrased!
What would you do to avoid a dry hole?


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## sydboy007 (12 January 2013)

*Re: A complete newbie beginners question*

the economists will talk about rational buyers and seller.

the reality is prices are just as much affected by fear and greed as anything else.

Personally I'm all for targeting companies with a track record of reliable dividends, growth in dividends, and what various analysts call an economic moat - eg Coca Cola or Nestle, P&G

For me the income from a share is more important than the price of a share - after I've purchased of course.  The dividends are mine - the market can't steal it back.  Capital agins are far more fickle.

The market may not always rationally reward companies paying good dividends, but over time they generally wise up.

Also remember that with the All Ord accumulation index (capital growth + dividends) around half of it was dividends.

Australia is lucky to have a market full of high yielding stocks.  In the USA 4% is considered high yield.

At the end of the day we're all just making a judgement call.  Hopefully we're right more often than when we're wrong.


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## Julia (12 January 2013)

*Re: A complete newbie beginners question*

It doesn't have to be any more complicated than supply and demand at the time.
Just consider how a SP rockets up if there is a take over offer in the wind.
Does that mean the company has suddenly increased in intrinsic value?  Doubt it.

A share, like any other commodity/product, is worth what someone is prepared to pay for it.
Ditto housing.  House prices are not determined on the 'value' of that dwelling.
More people want to buy houses than there is stock available, the price will rise and vice versa.

The reasons for anyone wanting to buy or sell are as many as those engaging in the transactions.


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## Joe Blow (13 January 2013)

*Re: What makes stock price rise in value?*

Hi Nev, if you have a question to ask, the thread title should be the actual question, rather than just letting others know that you have a question.

Just thought I'd let you know. I have gone ahead and re-titled this thread.


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## Buckfont (13 January 2013)

*Re: A complete newbie beginners question*



burglar said:


> Hi pixel,
> A wonderful post, elegantly phrased!
> What would you do to avoid a dry hole?




Make sure that they don`t forget to order the beer. Bf


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## joehann (13 January 2013)

*Re: What makes stock price rise in value?*

http://www.asx.com.au/courses/shares/course_03/index.html?shares_course_03


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## Gringotts Bank (13 January 2013)

*Re: A complete newbie beginners question*



springhill said:


> The purchaser thinks rightly/or wrongly the share price will increase, or they can attain value from that stock via dividends.




This is an exact and concise answer to the OPs question, imo.  

Here's my way of saying it: *Net expectation of future price drives behaviour of involved parties, and the resultant behaviour makes the price move.*  One can come to his own expectation in a number of different ways, (FA, TA, statistical analysis, hot tips, etc) but no one has ever clicked "BUY" unless he first has an expectation of future price.  The expectation may turn out to be wrong, but that's irrelevant.  Net expectation of future price = price movement.

The OP wants to know the reason for price movement so that he can maybe work out when to buy and sell.  To me that is an absolutely brilliant question, and so fundamental.  The answer (net expectation of those involved) may not immediately yield any great insight, but it's a good start.

The concept of value and perceived value is not something to be discussed here.  Current and future valuations are methods of coming to an expectation of future price, and they are not in themselves what makes the price move.  You would not buy a stock that you expected to go down in price, even if you had valued it much higher than its current price. 

*involved parties - those watching with intent to buy/sell or currently holding stock with intent to profit and/or minimize losses.


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## Gringotts Bank (13 January 2013)

If net expectation (which drives net behaviour) is what drives markets, then how do I find out what most people are expecting?  Can I profit that way?

Partner this with the fact that most people involved in trading will lose.  Let's say 80% of traders lose over the long term.  Each of the 80% has expectations which drives his behaviour during and before each trade.  Is it that his expectations are wrong (high rate of losers)?  Or is it that he doesn't understand his own expectations (reasonable win rate and a few big losers to wipe out the account)?

Can I leverage off the fact that most traders lose?  What do they do wrong, and can I do the opposite and come out ahead?

If I could know what others are expecting, would I buy?  Yes!  If the price is going up strongly, is that really a reflection of net expectation?  Probably not, since most traders lose!


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## Gringotts Bank (13 January 2013)

I'm creating a few circular arguments here, and I don't necessarily have the answer but if I start with some statements:

1. most traders lose
2. net expectation drives behaviour and behaviour drives price.

if 2) is correct, then either :

--losing traders' personal expectations are not in tune with the net expectation, or
--losing traders' personal expectation is out of synch with the big players money. or
--big players (insto and private) are the only real movers of markets and net expectation is unimportant

But if big players are the only real movers then they would always win (which they don't).  But that might just be because they are playing against other big players in the same stock.  

I think I need to attach a copper heat sink to my head.

I think it just comes down to this:  sell when the average guy is buying, if you think you can tell when that is.  And buy when the average guy is selling.  Backtests can show you that.


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## burglar (13 January 2013)

Gringotts Bank said:


> ... I think I need to attach a copper heat sink to my head. ...



A picture paints a thousand words!
I think you have painted a Picasso!!


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## CanOz (13 January 2013)

nev25 said:


> What makes stock price rise in value?




Buyers being more aggressive than sellers...


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## burglar (13 January 2013)

nev25 said:


> ... Why buy something for more than What its worth




What is it worth?
I can look up the price!
But that's not the same as its worth.
A large part of its worth can be intangible.


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## Trembling Hand (13 January 2013)

Gringotts Bank said:


> I'm creating a few circular arguments here, and I don't necessarily have the answer but if I start with some statements.




Yes GB you sound lost!! 

:fish:


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## nev25 (14 January 2013)

*Re: What makes stock price rise in value?*



Joe Blow said:


> Hi Nev, if you have a question to ask, the thread title should be the actual question, rather than just letting others know that you have a question.
> 
> Just thought I'd let you know. I have gone ahead and re-titled this thread.




Oops Sorry


Thanks all that answered

My way of thinking is
If I walk into a supermarket and see a jar of Vegemite on the shelf for  $2.50
I'm not going to offer the checkout chick $2.51 I'm going to buy if for $2.50 no matter what the price is tomorrow

And If I was going to but a Carton of Vegemite Jars I'm going to expect to pay a lot les for them per Jar??

On that thought 
I'm going to no assume that If I was going to buy the Vegemite to on sell to someone else and I am thinking the price will go up tomorrow I will offer a bit more to make sure they sell them to me

Right??????


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## springhill (14 January 2013)

*Re: What makes stock price rise in value?*



nev25 said:


> My way of thinking is
> If I walk into a supermarket and see a jar of Vegemite on the shelf for  $2.50
> I'm not going to offer the checkout chick $2.51 I'm going to buy if for $2.50 no matter what the price is tomorrow
> 
> And If I was going to but a Carton of Vegemite Jars *I'm going to expect to pay a lot less for them* per Jar??




Behind all failed investments you will find expectation.

nev25, your quote above is fundamentally flawed.

If you are to purchase jars of Vegemite in bulk you may receive a discount.

If you are to buy shares of a particular stock in bulk, you are likely to push the price up. Not down.

You have now contributed to a stock being potentially over valued. Over valuing a stock may entice sellers who see an imbalance, now your stock is worth less than what you paid.

In the case of Vegemite you may have bought a bargain in comparison to retail price, in the case of stocks you may have just bought a dud.

Vegemite has a recipe that makes it a consistent, reliable product, stocks do not.

Retail and the markets are not comparable.

Retail has structure, the market is a funky free-for-all that changes on a whim.


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## pixel (14 January 2013)

*Re: What makes stock price rise in value?*



nev25 said:


> On that thought
> I'm going to no assume that If I was going to buy the Vegemite to on sell to someone else and* I am thinking the price will go up tomorrow* I will offer a bit more to make sure they sell them to me
> 
> Right??????




Right! 
You've got it. (Provided of course, as the crowman says, your "thinking" matches the market's whim.)

At the time of High Inflation (Germany, 1923) when prices would rise tenfold week-on-week, one farmer took two pigs to a butcher late on Friday, offering them at next week's prices (minus a little discount). Since the butcher knew he couldn't have the meat and sausages ready for sale before Monday anyway, be took the deal and paid cash. The farmer rushed around the corner into the bank branch with minutes to spare before closing time, and paid off his mortgage *at the current week's rate*. 

Had the farmer's timing been wrong, had be missed the bank's closing time, he would of course have been worse off at least by the discount, because he could've kept the pigs a couple of days longer and sold them for twice or more.


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## skc (14 January 2013)

Gringotts Bank said:


> This is an exact and concise answer to the OPs question, imo.
> 
> Here's my way of saying it: *Net expectation of future price drives behaviour of involved parties, and the resultant behaviour makes the price move.*  One can come to his own expectation in a number of different ways, (FA, TA, statistical analysis, hot tips, etc) but no one has ever clicked "BUY" unless he first has an expectation of future price.  The expectation may turn out to be wrong, but that's irrelevant.  Net expectation of future price = price movement.




Not bad. A few adjustments ... 

Prices move due to the marginal buyer/sell's perception of NPV of future cash flow

"Net expectation" don't matter... I may have a expectation of BHP being worth $50, but I already hold 1000 shares and fully committed. My expectation does not influence the share price since I am not trading it. The share price is always determined by the marginal buyer / seller. That is, those who are most willing to buy or sell. 

And buying and selling are based on NPV of future cash flow. The price received for the share is simply one part of the cash flow. The others are obviously dividends, interests, capital return etc. The term "future" may be as long or as short as you like. The seller expecting his future cash flow to be 2c less in 5 minutes will sell at $1.00 rather than wait for 98c. 



Gringotts Bank said:


> I'm creating a few circular arguments here, and I don't necessarily have the answer but if I start with some statements:
> 
> 1. most traders lose
> 2. net expectation drives behaviour and behaviour drives price.




It's great to see you applying logic. You have 2 premise but 1) is untested. I think you will find that those studies about 90% traders losing are done for future products. I believe, depending on market conditions, there'd be times (and possibly extended periods) when a large proportion of retail traders are profitable (think tech boom etc).



Gringotts Bank said:


> if 2) is correct, then either :
> 
> --losing traders' personal expectations are not in tune with the net expectation, or
> --losing traders' personal expectation is out of synch with the big players money. or
> ...




Your first deduction "losing traders' personal expectations are not in tune with the net expectation" is already sufficient to explain what you observe in the market. The second and third duductions are essentially the same, since you must take the big instos into account of net expectations (and of course there are more than one of them). 



Gringotts Bank said:


> I think it just comes down to this:  sell when the average guy is buying, if you think you can tell when that is.  And buy when the average guy is selling.  Backtests can show you that.




This would be true only if your premise 1) is correct. But this is only relevant if you think that it is easier to detect the buying and selling intentions of the "average guy" vs directly attempt to analyse the "net expectation" of all the monies involved.


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## skc (14 January 2013)

springhill said:


> Vegemite has a recipe that makes it a consistent, reliable product, stocks do not.
> 
> Retail and the markets are not comparable.




Yup. You see plenty of books saying "you'd buy more in a shop when the prices are down, so you should do the same with shares". That is the least helpful analogy ever.

I believe a useful analogy is hookers. If a hooker drops her price and gives you a discounts for her service, the first thing you should think is if she's got some new disease you didn't know about.


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## burglar (14 January 2013)

I told a friend that if he ate vegemite, it would help him get citizenship!
So keen was he to become a citizen, he bought the biggest jar!!
Soon after, he gave me the jar with orders to give it home to my children.
I opened the lid to find the most delicate scraping.

:


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## ceasar73 (14 January 2013)

I used to ask myself this question in the begining..EPS..INVY (GREED) > FEAR ..??  etc etc.
I don't care anymore b/c to me, 'why' matters not...*.the market is always right*
When my indicators say uptrend, I buy .When they say downtrend, I sell.
Price to me only matters when I sell.
I have started doing well with this simple method.
regards,
ceasar73.


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## pixel (15 January 2013)

burglar said:


> I told a friend that if he ate vegemite, it would help him get citizenship!
> So keen was he to become a citizen, he bought the biggest jar!!
> Soon after, he gave me the jar with orders to give it home to my children.
> I opened the lid to find the most delicate scraping.
> ...




We took a couple of jars Overseas to introduce family and friends to our "edible axle grease". That's what they called it after just one scraping. Only one couple enjoyed it - they were returnees from Hermannsburg, retired back to the Fatherland. Made them extremely happy when we left one jar with them. The other one we had just about all to ourselves. It helped keep our homesickness at bay.


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## Pnut (20 January 2013)

There is also another reason for prices to rise and fall, its the stops above and or below the market.
i.e. A trader buys a stock the first thing he does is place a stop loss just below the last pivot low. The second thing he does is either put his target a million miles in dream land or tells himself hes going to hold on until he sees a definite reason to exit. 
What has happened here ? The trader that has all the confidence in the world of a stock rising has put a negative on that stock when it finally hits his stop he will sell out at the lowest price seen in weeks and all his fellow traders who have their stop there help him to drive down the price of the stock. 
Or the reverse could be true. 
A trader believes a stock is ready to collapse. He sells the stock short and puts a buy stop just above the market. He dreams about making his fortune on this very trade and retiring to the gold coast, so decides to not place a target and just let the money flood the trading account till it overflows. The market wanders around then a quick spike gets him buying the stock at new highs.

My opinion higher prices beget higher prices and lower prices beget lower prices.
Pnut.


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