In: Finance
The price of a stock is directly related to the expected future price and earnings. Select one: True False
False.
The price of a stock is not directly related to the expected future
price and earnings. It is related to a lot of different
things.
Let's understand in detail.
No-one can predict the future. Thus expected future price and
earnings are statistics which are driven by certain variables and
assumptions carried out by Financial Analysts. They design
financial models which show what the financial future of the
company would look like. This is done by doing a lot of research on
the past trend of the earnings and future management outlook. Also
industry dynamics, order book of the company, macroeconomic
dynamics, industry demand and supply are taken into
consideration.
The stock price is said to price in all the available information.
Thus when these future earnings are broadcasted on the live media
portals, there is a temporary movement in the stock price due to
the expected earnings potential and figures, However this is
short-lived. The actual stock price of the company is determined by
the true underlying value of the company which is called as the
Intrinsic Value of the stock. It should be noted that these future
forecast of price and earnings are ultimately forecasts and no-one
knows what the actual figures are likely to be. Thus it can be said
that which there can be a temporary movement in the stock price
when the expected future price and earnings are shown on the live
online portals like Bloomberg Terminal and Thomson Reuters, it is a
fact that ultimately the stock price will revert to the price which
depicts the true earning potential and underlying value of the
company.
Also a lot of the news flow impacts the stock price in the short
term. However in the long term the stock price will always revert
the the actual Intrinsic value which is defined by the inherent
fundamentals of the company and the true earning potential of the
company.