The Real Value of a Stock

Fausto Pugliese |

The Real Value of a StockAs a professional trader and teacher of thousands world-wide at Cyber Trading University, I am often asked questions like, “What is the stock worth?” It surprises them when I mention that I do not know or care about the value or worth of a stock. I chose all of my stocks based upon one factor and one factor alone: supply and demand.

Traders, new traders especially, make the mistake of picking their stocks based upon this supposed “value” or “worth”. They snub stocks that “aren’t worth that much” and ultimately lose out on some very profitable trades. These traders allow themselves to become wrapped up in the thought process of the investment gurus, and are confused about both the function of the stock market and their roles as traders.

In order to explain this further, I would like to review the basic function of the stock market. The stock market functions as a place for investors to buy and sell stocks. The prices of these stocks are set by the individual buyers and sellers. Thus, the price of a stock is based solely upon supply and demand. While this may seem like an obvious observation, it is essential to understanding how to make money as an active trader.

Understanding that the price of a stock is based entirely upon supply and demand will help you realize that “value” and “worth” are meaningless concepts to a trader. Value and worth are just two of the numerous myths that traders allow themselves to believe regarding their trading. The idea of needing to know a stock’s potential value or current worth stems from one of the most common trading myths: “Only a financial genius can navigate the stock markets”. Believing this makes it impossible for the average Joe to trade successfully. It instills the feeling that he will never be able to make a profit because he does not know enough about the stock market. This feeling and belief is enough to sabotage yourself in the stock market!

Perhaps the reason that this myth is so prominent is that value and worth are useful concepts to long-term investors. Due to this, investors and analysts place a large emphasis on picking stocks based upon PE ratio, book values, EBITDA, etc. This information is ultimately irrelevant. These professionals are operating under the theory that if you pick a fundamentally sound company, the stocks will increase in price value over time. However, as active traders we are not concerned with picking “good” stocks. We are concerned with making money in the stock market. This is not the same!

Unlike investors, traders are not interested in dividends issued every quarter, or price increases that may take years to develop. Traders are interested in making money today! Similarly, traders are not interested in the potential future value of a stock. Instead, we are concerned with the price range in which the stock is currently trading. Even though an analyst may deem a stock to be valued at $100 per share, it may currently only be trading at $50 per share. Whether the stock is really “worth” this much by the analyst’s standards is unimportant.

As a trader, I am interested in making money short-term. The only information that I take into consideration is the price that the public is willing to pay for a stock because this is the only factor that determines the price of a stock! Thus the only information that will determine whether a stock is “worth” trading is what the public is currently interested in selling or buying shares of this stock for. I am looking for stocks where I can buy shares from people who think the shares are worth less (buy low) and sell them to people who think that they are worth more (sell high).

As active traders, we need to understand that the stock market is not run by the analysts. It is run by supply & demand. We cannot pick our trades based upon the underlying company profit, whether the company has an amazing product, or if it is in a strong cash position. We do not care about the “value” that professional investors have placed upon a stock, as this value is irrelevant to the price of the stock in my trading timeframe. I am only interested in trading stocks and taking my profits, not in the value of the stock months after I’ve exited the trade!

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
RBS.P.L Royal Bank of Scotland Group Plc (The) ADR represe 25.30 0.07 0.28 41,583

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