Stock values are affected by factors outside of companies' control.
Corporations' stock has two distinct values: a par value and a market value. Stock investors make trading decisions based on the current, past and future market values of stocks on the market. Market values change constantly throughout each trading day and into the after-hours markets. Understanding the concept of market value, and how it applies to stock trading, is essential for anyone interested in making money on the stock exchange.
Par vs. Market Value
When corporations sell stock to the public, they assign what is called a par value to the stocks. Par values have no practical relevance in twenty-first century stock trading, and many corporations arbitrarily assign a par value of $1 to their shares.
Market value, on the other hand, bears all the relevance in the world to stock traders and corporations. A stock's market value is the price at which sellers and buyers in the market agree to trade at a given time. A stock's market value represents the current value that it would cost to purchase a share of the stock from another investor through a stock exchange. Market values fluctuate for a number of reasons, including fundamental, technical and emotional factors.
Fundamentals
Stock traders use fundamental analysis to judge the true value of stocks compared to their current market values. Analyzing companies' fundamentals involves digging into their financial statements to look into revenue, expenses, debt, profitability and other financial measures that give insight into how efficiently each company is managed. Stock traders compare key financial ratios for individual companies against their competitors and industry averages to determine whether they think a stock is undervalued, overvalued or priced correctly in the market.
Traders base buying and selling decisions on their predictions of future market values based on fundamental factors. This can act as a self-fulfilling prophecy, as traders' actions in response to their predictions cause market values to shift towards the predicted levels.
Technical Trends
Technical analysis is another powerful method of predicting stocks' future market values. Technical analysis looks only at price trends for stocks, using advanced statistical models to predict where stock prices will move in the future based on external factors and past data.
As with fundamentals, technical trends can cause their own predictions to come about. If technical analysts believe that a particular stock's market value will decline in the future, they may rush to sell their shares, actually causing the price to drop.
Emotional Theory
Not all influences on stocks' market values are logical and rational. Emotional theory in the stock market describes the fact that stock traders can react irrationally in response to emotional influences or irrational expectations.
A scandal on the news related to a publicly-traded corporation, for example, can cause droves of stockholders to sell their shares, expecting the price to drop in spite of the company's strong fundamental and technical data. An emotional sell-off can actually cause a stock's price to plunge, making emotions a dangerous variable in determining market values.
