A very simple question really, what is a stock? A simple question when viewed through the eyes of logic, however people have been indoctrinated to believe that a stock is its own little entity, doing as it pleases separate from the corporation with which it belongs. How can this be? Isn’t a stock simply a small portion of what the company is worth? A fraction of the total value of a company?
Well it is! Though you simply would not believe that when looking at the stock market from day to day, how the prices can fluctuate anywhere from down 10% to up by 20% in a single day! Imagine this happens everyday to a vast majority of stocks, even when no news has been reported stocks still go up and down. It’s easy to get sucked into the likes of the Efficient market hypothesis (EMH) and the Modern portfolio theory and believe that Beta is the true answer to all stock market dreams. But how can a measurement that calculates human emotional reaction as its main data source truly be reliable? Isn’t that what Beta does? It measures human psyche in it’s calculations giving us a fair value for what a given stock is worth. And when combined with CAPM then we have truly measured a stock and human psyche to perfection.. or?
It is easy to believe that a stock is a separate entity enjoying its own little life, it is even easy to believe that by looking at the movement on a chart we can decide where the price is heading, or by using complicated calculations with Greek symbols and all, that we can truly find the value of a stock.
My question and the reason behind this website (besides my own addiction to stocks) is, where and when did logic disappear from the stock market? With every passing day more and more complicated theories with an impressive amount of Greek symbols are created in order to determine the proper value of a stock. But isn’t a stock simply a portion of a corporation? Isn’t a stock in reality the valuation of that corporation? While the stock price may fluctuate (and thankfully for that) it is still a part of a corporation.
A good example of this and my favorite is, what is a cell phone? I will use Nokia in particular because everybody knows who they are. When most people see a cell phone they only see a cell phone, however isn’t a cell phone a stock? And if everybody is walking around with this one stock (cell phone), if everywhere you look this stock is in someone’s hand, isn’t that a telling sign for the company? Or if everyone has the same Mp3 player with the white little earbuds, isn’t that a good sign for the company and stock as well?
End of part 1
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