A number of fundamentals determine the value of a stock in the long run, but from day to day, prices are essentially set by public opinion. At the end of each day, prices are what the consensus of buyers and sellers decided they should be.
That market opinion may eventually prove to be misguided, but in the meantime it's a powerful force that investors have to reckon with. For some, understanding market behavior is a core part of their investment approach. Even if your approach is based more on company fundamentals or valuationGlossary: How expensive an investment is compared with what it earns or owns. Measures like the P/E ratio show whether a price is high or low relative to profits. factors, it pays to know something about how popular trading behavior can influence prices.
After all, true value can take a long time to emerge. Before that happens, the force of market opinion can drive stocks a long way above or below their true value. Trying to ignore the power of that can be like standing in front of a landslide.
Keep reading with All-Access
Get a wealth of educational content and powerful investing tools backed by a quarter century of research.
