Good question. I think social scientists refer
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Posted On: 07/08/2021 12:44:30 PM
Re: Riztheinvestor #95698
Good question.
I think social scientists refer to this as a "crisis of confidence".
The marginal buyer aka those who could or would buy the stock are suffering a "crisis" of believing their potential purchase will result in an immediate loss.
As they refrain and wait for a "safer" purchase price, the next set of potential buyers behind them aka the new marginal buyers in the queue face the same decision and make the same decision as the previous group. This process repeats and repeats until a "new" clearing price is found. This new clearing price is the price at which a majority of all the previously queued potential buyers now believe there exists new buyers behind them who are willing to pay "more" than they are. All of the preceding assumes the item in question to be purchased possess an intrinsic value that is higher than the implied value of the asset given its current price.
The stock, like any stock, will continue to fall in price until new buyers show up who the current marginal buyer believes will pay a higher price than herself. Until this happens the stock, like any stock, will continue to fall in price.
The way our unique American style capitalism works is that managements of public companies are made responsible for communicating to the market place information and assurances to that information about the viability of their company's intrinsic value (whether its growing, stagnant or contracting).
To the extent that this communication does not happen or happens infrequently or poorly, current market prices will tend to reflect this attribute of a management's performance more than others.
If stock prices reflect the total sum of available 'news' about and on the company, then the job of disseminating that news and its timing and veracity is the primary job of management to the financial market place. The stock price can then be seen as the closest proxy to a management's veracity and skill at communicating information in a timely manner allowing all potential buyers of its stock to assess the company's current intrinsic value. As new information is learned either from management or from the market in which the company competes, this information will be incorporated into the stock price by the next marginal buyer.
Hope this helps answer your question.
Stay safe
TSOV
I think social scientists refer to this as a "crisis of confidence".
The marginal buyer aka those who could or would buy the stock are suffering a "crisis" of believing their potential purchase will result in an immediate loss.
As they refrain and wait for a "safer" purchase price, the next set of potential buyers behind them aka the new marginal buyers in the queue face the same decision and make the same decision as the previous group. This process repeats and repeats until a "new" clearing price is found. This new clearing price is the price at which a majority of all the previously queued potential buyers now believe there exists new buyers behind them who are willing to pay "more" than they are. All of the preceding assumes the item in question to be purchased possess an intrinsic value that is higher than the implied value of the asset given its current price.
The stock, like any stock, will continue to fall in price until new buyers show up who the current marginal buyer believes will pay a higher price than herself. Until this happens the stock, like any stock, will continue to fall in price.
The way our unique American style capitalism works is that managements of public companies are made responsible for communicating to the market place information and assurances to that information about the viability of their company's intrinsic value (whether its growing, stagnant or contracting).
To the extent that this communication does not happen or happens infrequently or poorly, current market prices will tend to reflect this attribute of a management's performance more than others.
If stock prices reflect the total sum of available 'news' about and on the company, then the job of disseminating that news and its timing and veracity is the primary job of management to the financial market place. The stock price can then be seen as the closest proxy to a management's veracity and skill at communicating information in a timely manner allowing all potential buyers of its stock to assess the company's current intrinsic value. As new information is learned either from management or from the market in which the company competes, this information will be incorporated into the stock price by the next marginal buyer.
Hope this helps answer your question.
Stay safe
TSOV
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