The Formation of Stock Prices

Poul Lykkesfeldt () and Laurits Louis Kjaergaard ()

Chapter Chapter 2 in Investor Relations and ESG Reporting in a Regulatory Perspective, 2022, pp 11-19 from Springer

Abstract: Abstract In this chapter, we explain the formation of stock prices. In real life the intrinsic value of a stock is unknown. Therefore, an investor must include the appropriate factors and uncertainties to estimate the cash inflow and outflow, and the discounting factor. As a result, fundamental investors attempt to understand a business to determine roughly how they will perform in the next 10–30 years by setting assumptions of how competitive forces can shape the company, as well as what the demand of the company’s products and services will be, including the company’s ability to perform throughout a business cycle. Fundamentally, the more disparities there are in the aggregated assumptions of the investors, the more shares of companies are traded, and the more stability of assumptions, the fewer shares are traded. All stocks have a daily volatility level, which is irrelevant for IR, as it cannot be tampered with. A relatively higher volatility is typically the result of an increased uncertainty in the financial market about a company’s future. However, best-practice IR can provide significant value to a company in terms of added market capitalisation in the event that a company’s volatility and risk premium is reduced.

Keywords: Risk premium; Fundamental investors; Speculative investors; PESTEL-DC; Porter’s five forces; Efficient markets; Scuttlebutt; Information advantage (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-05800-4_2

Ordering information: This item can be ordered from
http://www.springer.com/9783031058004

DOI: 10.1007/978-3-031-05800-4_2

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().