priceI realize that “asset price is determined by ‘the market’” but is it the part of the market that sends the largest order in to a market maker or what? Because I know that I am part of ‘the market’ but I want to get filled way out of the money at prices different from the current bid/ask price.
Anyway, two companies in the same industry, company ABC is older, successful, has a stronger clearer business plan and trades at a fraction of the cost of another company, company XYZ has the same business plan, is younger, competes with ABC, but its shares have been driven up 3x higher.
Lets say ABC trades at $600 a share, and XYZ trades at $1,350 a share. Why do people feel it is acceptable or desirable to have bought XYZ shares at $1,350 or higher? I realize there are other factors such as market cap and shares outstanding, but I feel like I am still missing an important piece of this puzzle.
Lets say I personally feel that XYZ should be $500/share, and that ABC should be a comparable $1,350 a share. On the open market it is impossible for me to get these shares (not using options), yet I feel that the immediate pricing information is incorrect, how would I convince someone to fill me at the appropriate price such that the last displayed quote reflects this new price?
The market price reflects the price that people are willing to trade at right now. Of course you’d like to trade outside this range: who wouldn’t? You could make an instant humungous profit. Which is why it’s not going to happen.
The share price reflects the market’s best estimate of the company’s current market cap. Share price is meaningless without associating it with the number of shares in issue. A company with a share price of $600 with 1,350,000 shares, is worth the same as a company that has a share price of $1,350 with 600,000 shares.
If you feel the current pricing is incorrect, and will correct itself in due course, then short the overpriced share, buy the underpriced share, and wait. Or buy & sell combinations of options that have strike prices that reflect your position, and leave you neutral on volatility
If ABC trades at $600, why on earth would you buy at $1,350? That’s just throwing money away. Similarly, if XYZ trades at $1,350, who in their right mind would sell to you at $600, when they can sell to someone else at $1,350 - they would just be throwing money away.
The market is the right price; it may be irrational, but it’s still the right price. If you think the price should be different right now, then you’re wrong. The market is right. However, if you think that the market will go in a particular direction over time, then you can bet on that, and profit if you are correct.
But remember, when betting that everyone else is wrong: the market can remain irrational longer than you can remain solvent.
There are a tonne of reasons why market caps for apparently similar companies would vary - the market reflects the known facts and aggregate sentiment - and that latter is a strange, irrational beast.
In the old days you would go to the village centre with your chickens to find someone who wanted to swap his goat for your chickens. If you went with one chicken and hoped to get a goat for that, no one would be willing to trade with you. They would want at least five chickens for your goat.
However, if there was some crazy goat disease spreading around the land, people would be keen to get rid of their goats because if the goat dies they get nothing for it. Then you might be able to convince them to swap your chicken for their goat.
The stock market is similar. If you wanted to buy shares for 600, you could place the order for that price. If there are people willing to buy the same shares for 1,350 no one would sell to you they would sell to these people instead.
If the company announces that it hasn’t been able to sell anything this year and they might go bust, people will suddenly think that they are holding duff shares and will want to get rid of them. No one will want to buy them - but you still have your order out there (maybe you went away on holiday). People will then snap up the chance to sell you their shares for 600.
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