Saturday, December 07, 2019 5:30:58 AM
To begin, we must first understand what price is. Financial theorists define stock price as the present value of all future earnings expectations for the company, divided by its number of shares outstanding. What this means is that the earning capacity of the company is what defines price. Often, companies can get significant value out of a relatively small investment in assets because the ability for those assets to make money is significant.
Even companies that lose money today can have a high share price because price is based on the future earnings of the company. No enterprise is in business to lose money, so the expectation is that every business will make money some day. So long as there is the potential for future revenue streams to shareholders, there will be a price that someone is willing to pay for the shares.
The earnings that a company could make in the future, the growth that the company could realize and the time to the realization of those goals are all factors which affect the estimate that the market makes on the earnings potential of the company.
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