Question

Explain why and how a company's performance on the stock market is driven by changes in the stock market expectations, not just by the company's actual performance.

Answer 1

Stock market is futuristic in nature and it is always trying to discount the future events at the present and make those future event reflect upon the prices so company's performance of the stock market is driven by the changes in the stock market expectation of the performance of the company in future and not just the present performance because stock market participants are always trying to determine the valuation of the company in the future and the growth prospect of the company in the future and they will be trying to ascertain the value of the present so that the company should always try to provide a better present performance and future performance by maintenance of a higher growth rate in order to attract large amount of investors to invest into the company.

Hence, it can be said that the due to the futuristic nature of the stock market and high amount of speculative element involved in the participation of stock market by market participants, the prices of a company's stock is driven by the the changes in the stock market expectation not only by the performance of the company in the short run.