In article <1992Dec18.165629.21654@pslu1.psl.wisc.edu> dbk@pslu1.psl.wisc.edu (Don Katz) writes:
In article <1992Dec17.233131.1489@cbfsb.cb.att.com>, chandrab@cbnewsf.cb.att.com (b.chandramouli) writes:
|> Value (worth) of a stock is what the buyers are willing to pay
|> for it.
|> What a buyer wants to pay is what the buyer things the stock is worth.
|>
|> This circular definition is inherent to the way valuation of a stock
|> is done. This is not just true for stock valuation. Similar circular
|> concepts are inherent in the valuation of real estate, collectibles etc.
|> May I extend this to say that whereever there are Supply and Demand
|> forces are acting to set the price of anything, circularity is inevitable?
I disagree strongly. Stock has an intrinsic value based on either its value as ownership in a company (and therefore its value if the company is sold, and the value is realized), or as the source of an on-going and increasing stream of dividends.
A coin has "intrinsic" and "numismatic" value. Its intrinsic value is what
you can sell it for as gold or silver or cupronickel. Its numismatic value
is what other people might pay for it because it's pretty, or because there
are only 3 of them in the world, or whatever.
Stocks have no intrinsic value; you can't melt them down. "Book value",
sometimes used as an attempt to determine such a value, is a very weak
concept. What is the current value of the trademarked name "Oreos"?
There's no objective way to value a trademark, so there's no way to tell
the book value of the company that owns it, so there's no way to tell what
a reasonable price/book value for the stock might be.
Your other example is the value of future dividends. Anyone can guess what
future dividends might be, but nobody can KNOW. All those who value stocks
based on dividend yields have different opinions on what the future holds
and consequently they hold different opinions of the value of the stock.
