The value of most stocks is a combination of the current value of the company and the value of the profits it will make in the future.
In general, the more growth the market expects from a company, the more the company's market value will owe to expected future profits.
Take online bookseller YY, for example. By most measures, company YY has little or no current value; it has only minuscule book value and is gushing red ink. Liquidating company YY would leave its investors with zilch. But the market thinks the company's future profit potential is so bright that it has pinned a multibillion-dollar worth (the company's market capitalization) on the stock.
Another way to think of a stock's value is that a company's stock price consists of a combination of what you are paying for the company's current level of profitability and what you're paying for its earnings growth.
Since company YY is far from profitable then, the stock price is based almost entirely on expectations of future growth. That is one reason company YY's stock is so volatile.
As those expectations rise and fall, so does the price of its stock.
In comparison, the stock price of another stock XX largely reflects the company's current value, not its future growth. Company XX is quite profitable, but no one expects it to grow terribly fast.
In general, the more growth the market expects from a company, the more the company's market value will owe to expected future profits.
Take online bookseller YY, for example. By most measures, company YY has little or no current value; it has only minuscule book value and is gushing red ink. Liquidating company YY would leave its investors with zilch. But the market thinks the company's future profit potential is so bright that it has pinned a multibillion-dollar worth (the company's market capitalization) on the stock.
Another way to think of a stock's value is that a company's stock price consists of a combination of what you are paying for the company's current level of profitability and what you're paying for its earnings growth.
Since company YY is far from profitable then, the stock price is based almost entirely on expectations of future growth. That is one reason company YY's stock is so volatile.
As those expectations rise and fall, so does the price of its stock.
In comparison, the stock price of another stock XX largely reflects the company's current value, not its future growth. Company XX is quite profitable, but no one expects it to grow terribly fast.
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