the company’s balance sheet, which can be used to reinvest in the company
through
capital expenditures, or to pay a dividend to company shareholders.
The company’s stock is all together different, because it trades on an exchange
and buyers and sellers determine the price of that stock and what they are
willing
to pay.
In my experience, very little buying and selling is based purely on
fundamental valuations. Most market action is based on a trader or investor’s
emotions.
Every buyer and seller has a different motivation for buying or selling. The only
rational reason to buy a stock is because you think that the stock is going to go
up in price and you will make money. Even when short
sellers buy a stock back
to cover their short position, it is because they want to lock in their profits before
the stock goes higher.
While there is only one reason to buy a stock, people
will sell a stock for many
different reasons:
- They need the cash.
- They see a better investment or trade.
- They are fearful that the price will go down.
- A mutual fund manager has to sell holdings to raise cash.
- They believe the future of the company is in peril.
- They are fearful about the economy.
- They believe a new technology will disrupt the company.
- Something on the daily news.
- A rumor that is causing the stock to drop.
- They are nearing retirement and changing their portfolio balance.
- They are rebalancing their portfolio by selling positions that have gotten too
large.
- The shares are inherited and the heirs prefer cash.
All of these reasons for selling play out every day. None of them required a
balance sheet or a price-to-earnings ratio. The markets are largely driven off the
decisions of the asset holders rather than fundamental valuations.
The buyers and
sellers on stock exchanges can be value investors, high frequency traders, trend
followers, day traders,
swing traders, growth investors, mutual fund managers,
or hedge fund managers. All market participants have one motivation: to make
money.
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