The Difference Between Price and Value

By Emil Lee / Morningstar.com

When I tell people that I’m an equity analyst, I’m often presented with a rather bizarre question: “So, what actually makes stocks go up and down?” I usually fight the urge to rattle off some sort of sunspot-and-Fibonacci-sequence conspiracy theory and tell them the mundane truth: The stock market, literally, is an auction in which people around the world bid for fractional ownership of companies. We think one of the biggest, if not the biggest, mistake in investing is confusing the price of stocks with the value of the businesses they represent.
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