Quote:
Originally Posted by Rathji
I assume this means all shares of the company? What circumstances would lead to a company not being worth that amount as Slava contends? Speculative price increases?
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If you bought every share of the company and say it cost you $100 (for ease of explanation here...not implying that Apple or any other company is worth this!). The company has a market cap(as in market capitalization) of $100.
If the assets and sales and whatever you are using to value the company are worth $100 you are even and the company is selling at fair value. If these things add up to $90 you are paying too much, and at $110 you are getting a deal. The methods to properly value a company are much more complex than what I'm alluding to here, and different people have different ways of doing this. Some people have no way of doing this and just buy stuff because it sounds like a good idea (kind of like how my wife picks winners for her football pool...by the team names and uniform colours).
Not to turn this in a whole thread about stocks (like we need more of these!), but there are some investors (growth) who will pay for what they believe that the company is going to do going forward. So if the company is priced properly at $100, but they think that it will pursue a course of action, or sell a lot of goods then they will pay the $100 in hopes of the growth being accurate, and aim to get their return based on this growth of the company.
Other investors (value) will buy the stock at 90 to get the $10 that its undervalued by. At $110 the value investor is not at all interested. Of course some of the stocks that sell for $90 never get back to $100.
Your question about why people pay too much or buy stocks for too much is way to complex to get into (especially in a thread like this!). If you are really interested PM me and I'd be happy to stand on my soap-box though!