Question:

How far into the future does stock price reflects?

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So the price of the stock reflects (or tries to reflect) the performance of a company in ther future, but how far into the future are we talking about? Next month? Next quarter? Next year?

Lets say a company's stock trending down for many months and it bounce back recently. Is the company expected to turn things around in a month, a quarter, or a year?

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4 ANSWERS


  1. It really doesn't reflect the performance of a company in the future. Aside from the fact that good performance usually continues in the short term, stock price isn't a predictor.

    Follow the trend and learn supply and demand. Here's a good resource for what determines a stock's value:


  2. Forever.  

    It's a simple calculation of cash flow for infinitly in the future.  One assume a corporation will be here for forever.  Yes, that is an assumption, but necessary for the calculation.  In simple terms, the following is the formula for evaluation price.

    stock price = cash flow / risk

    One then ask, isn't there a speculation factor?  Well, yes and no.  Speculation means evaulation of risk.  If something is risky, it changes the bottom, thus a lower price.  

    Now, how come there are different people with different price expectations?  If it's a formula, wouldn't it spit out the same price for everyone?  No.  It depends on how they assign risk to that particular stock.  You may think that a dot com is risky but someone else believe it's a sure thing.  What assumptions do they make on the cash flow.  Are they expecting this cash flow to grow?  How fast will it grow, etc. Again using the dot com example, you may think it won't grow very fast if at all.  Another person may think it'll be explosive.

    Now, bubbles and crashes are people making wrong assumptions.  Or something happened so the assumptions no longer hold, such as war causes slower economy causes slower growth causes lower stock price than previously expected.

  3. It doesn't work that way.  It's today's estimate of the discounted cash flows to infinity.

  4. Economics 101: the price is determined by supply and demand.  So if one day there no demand for one particular stock and there's too much supply, the price goes down; and vice versa.

    All the BS about future performance of the company is all about perception, and you must add:

    - perception about the industry

    - perception about the stock market

    - perception about other extrnalities that are perceived to be related to the company, the industry or the market.

    It's more about psychology than to finite science.

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