Share price
Encyclopedia
A share price is the price of a single share of a number of saleable stock
s of a company. Once the stock is purchased, the owner becomes a shareholder of the company that issued the share.
and financial theory, analysts use random walk
techniques to model behavior of asset
price
s, in particular share prices on stock markets, currency exchange rates
and commodity
prices. This practice has its basis in the presumption that investors act rationally and without bias, and that at any moment they estimate the value
of an asset based on future expectations. Under these conditions, all existing information affects the price, which changes only when new information comes out. By definition, new information appears randomly and influences the asset price randomly.
Empirical studies have demonstrated that prices do not completely follow random walks. Low serial correlations (around 0.05) exist in the short term, and slightly stronger correlations over the longer term. Their sign and the strength depend on a variety of factors.
Researchers have found that some of the biggest price deviations from random walks result from seasonal and temporal patterns. In particular, returns in January significantly exceed those in other months (January effect
) and on Mondays stock prices go down more than on any other day. Observers have noted these effects in many different markets for more than half a century, but without succeeding in giving a completely satisfactory explanation for their persistence.
Technical analysis
uses most of the anomalies to extract information on future price movements from historical data. But some economists, for example Eugene Fama
, argue that most of these patterns occur accidentally, rather than as a result of irrational or inefficient behavior of investors: the huge amount of data available to researchers for analysis allegedly causes the fluctuations.
Another school of thought, behavioral finance
, attributes non-randomness to investors' cognitive and emotional biases. This can be contrasted with Fundamental analysis
.
When viewed over long periods, the share price is directly related to the earnings and dividends of the firm. Over short periods, especially for younger or smaller firms, the relationship between share price and dividends can be quite unmatched.
, substituting a quantity of shares at one price for a different number of shares at an adjusted price where the value of shares x price remains equivalent. (For example 500 shares at $32 may become 1000 shares at $16.) Many major firms like to keep their price in the $25 to $75 price range.
A US share must be priced at $1 or more to be covered by NASDAQ
. If the share price falls below that level the stock is "delisted", and becomes an OTC
(over the counter stock). A stock must have a price of $1 or more for 10 consecutive trading days during each month to remain listed.
s, based on the time value of money
, to estimate the intrinsic value of stock.
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s of a company. Once the stock is purchased, the owner becomes a shareholder of the company that issued the share.
Behavior of share prices
In economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and financial theory, analysts use random walk
Random walk
A random walk, sometimes denoted RW, is a mathematical formalisation of a trajectory that consists of taking successive random steps. For example, the path traced by a molecule as it travels in a liquid or a gas, the search path of a foraging animal, the price of a fluctuating stock and the...
techniques to model behavior of asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
s, in particular share prices on stock markets, currency exchange rates
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
and commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
prices. This practice has its basis in the presumption that investors act rationally and without bias, and that at any moment they estimate the value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
of an asset based on future expectations. Under these conditions, all existing information affects the price, which changes only when new information comes out. By definition, new information appears randomly and influences the asset price randomly.
Empirical studies have demonstrated that prices do not completely follow random walks. Low serial correlations (around 0.05) exist in the short term, and slightly stronger correlations over the longer term. Their sign and the strength depend on a variety of factors.
Researchers have found that some of the biggest price deviations from random walks result from seasonal and temporal patterns. In particular, returns in January significantly exceed those in other months (January effect
January effect
The January effect is a calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases.Therefore, the main...
) and on Mondays stock prices go down more than on any other day. Observers have noted these effects in many different markets for more than half a century, but without succeeding in giving a completely satisfactory explanation for their persistence.
Technical analysis
Technical analysis
In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...
uses most of the anomalies to extract information on future price movements from historical data. But some economists, for example Eugene Fama
Eugene Fama
Eugene Francis "Gene" Fama is an American economist, known for his work on portfolio theory and asset pricing, both theoretical and empirical. He is currently Robert R...
, argue that most of these patterns occur accidentally, rather than as a result of irrational or inefficient behavior of investors: the huge amount of data available to researchers for analysis allegedly causes the fluctuations.
Another school of thought, behavioral finance
Behavioral finance
Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market...
, attributes non-randomness to investors' cognitive and emotional biases. This can be contrasted with Fundamental analysis
Fundamental analysis
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and...
.
When viewed over long periods, the share price is directly related to the earnings and dividends of the firm. Over short periods, especially for younger or smaller firms, the relationship between share price and dividends can be quite unmatched.
Share prices in the United States
Many U.S.-based companies seek to keep their share price (also called stock price) low, partly based on "round lot" trading (multiples of 100 shares). A corporation can adjust its stock price by a stock splitStock split
A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included....
, substituting a quantity of shares at one price for a different number of shares at an adjusted price where the value of shares x price remains equivalent. (For example 500 shares at $32 may become 1000 shares at $16.) Many major firms like to keep their price in the $25 to $75 price range.
A US share must be priced at $1 or more to be covered by NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
. If the share price falls below that level the stock is "delisted", and becomes an OTC
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
(over the counter stock). A stock must have a price of $1 or more for 10 consecutive trading days during each month to remain listed.
History
Robert D. Coleman's Evolution of Stock Pricing notes that the invention of double-entry bookkeeping in the fourteenth century led to company valuations being based upon ratios such as price per unit of earnings (from the income statement), price per unit of net worth (from the balance sheet) and price per unit of cash flow (from the funds statement). The next advance was to price individual shares rather than whole companies. A price/dividends ratio began to be used. Following this, the next stage was the use of discounted cash flowDiscounted cash flow
In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...
s, based on the time value of money
Time value of money
The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. The time value of money is the central concept in finance theory....
, to estimate the intrinsic value of stock.