How to Understand the Difference Between Stock Price and Company Value

Apr 21 / Cayden Chang

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In the current bear market, there are really only two paths you could be on:

Route 1: You’re Already Holding Some Stocks

If you already own stocks, you might have noticed that some of their prices have dropped. And if you don't understand why they’re falling, it's completely natural to feel worried.

Let me ask you—how many of you have bought stocks and seen the prices decline? Most of you, right? That’s okay. You're not alone.

Route 2: You’re Not Holding Any Stocks Yet

A small group of you haven’t bought any stocks yet. For you, this could actually be a golden opportunity—provided you know what to do. If not, a year from now, you might still be sitting on the sidelines.

Now, let’s focus on those who are already holding stocks, since that's the majority.

Why Are You Worried About Falling Prices?

In value investing, our core objective is simple: buy a good company at a cheap price.

To determine what “cheap” means, we calculate the intrinsic value of a company. Let’s say you determine that the intrinsic value of a stock is $10. Ideally, you want to buy it at a price below that—maybe $8, $6, or even $5.

So if someone offers to sell you the stock at $11, you’d say no—it’s overpriced. During a bull market, prices might soar to $15 or higher, but as a value investor, you still wouldn’t buy because it’s overvalued.

The ideal time to buy is when the price is below intrinsic value.

The Problem When Prices Fall

Now imagine you bought the stock at $6, and it drops to $3. What should you do?

Theoretically, you should buy more. But in reality, most people panic and sell. Why? Because they’re afraid it’ll drop further—maybe even to zero.

But let’s take a step back. Why shouldn’t the stock go to zero?

Because you’ve already done your homework. You’ve researched the business and confirmed that it’s a good company. If that’s true, the stock price dropping to zero is extremely unlikely.

But if you bought it without understanding the company—just following others—you won’t have that conviction. And when it falls, you’ll panic. The other person can sleep peacefully because they understand what they bought. You, on the other hand, will lose sleep.

(Source: Al Jazeera)

Two Things You Must Be Sure Of

To stay calm when prices drop, you need two assurances:
  1. The company is fundamentally good, so the stock won't go to zero.
  2. The stock price will eventually rise again.

So how do we know prices will eventually bounce back?

Nobel Prize-winning economist Robert Shiller from Yale University proved that if a company does well financially, its share price will eventually go up. Conversely, if a company performs poorly, the stock price will fall.

This means if you have done your research and confirmed the business is solid, the price will recover in time.

But here's the key—this is an emotional journey. During a bear market, you need to convince yourself that you are right and the majority are wrong.

Most investors lose money. So if you follow the majority, odds are you’ll lose money too. That’s why when the majority is selling, you should be buying—assuming you’ve done your homework.

Later in the series, I’ll give you more tools to help you build this conviction. For now, just remember:

  • Understand the difference between price and value
  • Do your research
  • Trust your homework, not your emotion and what you think.


Because in investing, knowledge is your edge.

Want to know how to spot value stocks? Scroll down and register for my upcoming webinar!

Spot Value Stocks Now

In this live session, you'll see a step-by-step company analysis demonstrated by Cayden Chang, founder of Value Investing Academy. 

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Presented by Cayden Chang

Founder of Value Investing Academy and Award-Winning International Speaker, Lifelong Learner Award 2008, Personal Brand Award 2017


You will learn:

  • A deep dive into a fast-growth company case study.
  • The key financial metrics used when evaluating whether a stock has strong growth potential
  • Step-by-step guide on how to apply the Value Investing Methodology on real-life companies
  • The exact criteria that successful investors use when evaluating any company
  • How to determine the intrinsic value of a stock so you will know exactly when to enter or exit the market
  • How ViA Atlas Intrinsic Value (IV) Directory can get you started on building your own portfolio of superhero stocks, even for busy professionals without much time to spare.


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