How do shares get valued, anyway?

by Daniel on October 9, 2004

I’m trying to build up a small archive of articles that explain important things about financial markets in clear language to an educated liberal audience. This article in the Guardian by Edmond Warner is worth ten minutes of your time.



jonk 10.09.04 at 9:50 pm

nice project, something i have been meaning to do for several years now. do you have any other articles in your collection?


Maynard Handley 10.10.04 at 12:25 am

Surely the easiest answer to this is to recommend John Kay’s book _Culture and Prosperity_?
I guess to be fair that covers economics in the real world, as opposed to finance in the real world.


dsquared 10.10.04 at 12:44 am

I don’t think I’ve read that one (unless it was published under a different title in the UK), but would recommend almost anything by Kay on economics. He is often a bit vague about specific institutional details, though, which is where I thought the Guardian article was excellent.


R.Cynic 10.10.04 at 2:01 am

ME: how does anything get valued anyway? who made up these values?
whats that great big sucking sound?

*disappears into a relativistic black hole*


gordon 10.10.04 at 2:52 am

As a rule of thumb, I generally think of assets as having two values; one based on NPV of an income stream, the other being purely speculative. I wonder if anybody else has adopted this slightly weird approach?


Sam 10.10.04 at 4:11 am

“I remember this much of what he told me: a stock can be valued at the dividend it is paying now; it can be valued at the profit it’s making now; it can be valued at the increased profit you think that it will make in the future; it can be valued at the increased price that you think that others will pay for it. Marketers call the last, ‘total return.’ The dividend plus the increase in price is the ‘return’ on the investment. Economists call it a bubble or the ‘greater fool theory.”

From, the most intellectual porn you’ll ever read.


Ralph 10.10.04 at 4:41 am

Was this news? Did it contain any new ideas? Did it contain any ideas at all?


dsquared 10.10.04 at 1:07 pm

Yes! It did! That’s why I posted it!


Jason MCCullough 10.11.04 at 3:06 am

It’d be a lot more useful if they didn’t bury the single paragraph explanation two-thirds of the way down:

‘Buyers and sellers circle one another in the market for shares as in any other. Stockbrokers and market makers, taking their own views of corporate prospects and with an eye to making money from trading volumes, do adjust prices displayed on trading screens in an attempt to find the price levels that will clear the market. They put their own trading capital at risk in this process – they are often the marginal buyer or seller themselves, hoping they know where the “real” business might ultimately be.’


JM 10.12.04 at 5:00 am

Almost all stock markets are a sham. If the company had a sound business plan for a new production plant they could take it to a banker, get a loan, and after paying of the loan keep all the profit.

The banker will look at the plan, look at the companys ability to cary out the plan, and assign an intrest rate that is approprate to the risk.

If the plan won’t pass the banker test, the company goes to the market and asks you to purchse stock. You do and they get money to use any way they want. You have no promiss of payment of intrest on your loan to the company or repayment of principle. Your hope is that the company will pay you dividends and the stock will go up in value. The dividend is almost never enough to cover principle and intrest.

So to break even and posibly make a profit you last hope is that some idiot comes along and wants to pay you more than this under preforming investment is worth.

He purchases it from you hoping that he can sell it to an even more gulible idiot who can’t figure out that it’s just not paying a return suficant to cover it’s purchse cost.

Unless the company discovers oil in their back parking lot, some one at some point has to take the hit on this stock, because…. because it ain’t returning enough to cover it’s orignal cost.

Remember they promised you all the profit from this investment because… because it did not pass the banker test!

The banker test: Is the business plan sound enough to pay of the loan?

If the company had a sound plan they would not have to give the profit away to you. They would have used a bank or bond to rase the money and keep the profit for them selves.

Why would you give away the profit to an investor if you started with a sound busines plan? Why not just borrow the money at a resonable rate and then keep the profit for your self?

Think of it like your house. You go to the bank and say I make xx and therfor can pay yy and I would like a loan of zzz. The banker looks at your plan and if it is reaasonable he lends you the money.

You don’t go to all your friends stock to purchase the house because if you did, and you made money on it, then your friends would get the profit and you would just get the janitors fee.

You only need stock investors when you want money but don’t have a good way to repayit. In exchange for this extensive risk you promiss them the proft, if by chance you get lucky and there is one.

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