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From what I've read stocks basically only depend on what the market believes is the value of it.

So if everyone decided to not sell a stock no matter what, does the profit of the company matter at all? Whether or not the company does well, the price of the stock won't change right( in this example)?

If this is true, then is the only reason the whole system works because most people implicity agree to sell stocks when a company does bad and buy when its doing well?

  • People don't need to implicitly agree ... with enough participants the market should be rational even if individual participants are not. – TheMathemagician Mar 1 '17 at 12:43
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The short answer to your question is yes. Company performance affects stock price only through investors' views.

But note that selling for higher and lower prices when the company is doing well or poorly is not an arbitrary choice. A stock is a claim on the future cash flows of the firm, which ultimately come from its future profits. If the company is doing well, investors will likely expect that there will large cash flows (dividends) in the future and be willing to pay more to hold it (or require more to sell it).

The price of a stock is equal what people think the future dividends are worth. If market participants started behaving irrationally, like not reacting to changes in the expected future cash flows, then arbitrageurs would make a ton of money trading against them until the situation was rectified.

  • Not all market participants buy/sell based on what the future dividends are worth - this is a biased and limited view of the markets. Participants buy/sell for many reasons. – Victor Mar 1 '17 at 4:21
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    He's not talking about why or when they buy/sell. After all, every buy is someone selling too, and vice versa. He's talking about the price at which buyers and sellers agree. As he said, "The price of a stock ..." – David Schwartz Mar 1 '17 at 7:32
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people implicity agree to sell stocks when a company does bad

But, remember, when you sell the stock of a company that, in your estimation, 'did bad', someone else had to buy; otherwise, there is no sale. The someone else who bought your shares evidently disagrees with your assessment.

Did you sell because the company didn't earn a profit at all? Did it not earn a profit because it's in a dead-end business that is slowly but inevitably declining to zero? Something like Sears Holdings? Or did it not make a profit because it is in an emerging market that will possibly someday become hugely profitable? Something like Tesla, Inc.?

Did you sell because the company made a profit, but it was lower than expected? Did they make a lower-than-expected profit because of lower sales? Why were the sales lower? Is the industry declining? Was the snow too heavy to send the construction crews out? Did the company make a big investment to build a new plant that will, in a few years, yield even higher sales and profits?

What are the profits year-over-year? Increasing? Declining? Usually, investors are willing to pay a premium, that is more than expected, for a stock in a company with robust growth.

As you can see, the mere fact that a company reported a profit is only one of many factors that determine the price of the shares in the market.

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    Yes. The premise of the question is somewhat flawed here. It's not that people sell a stock when it's doing poorly and buy when it's doing well. That would be impossible, as every sale must have both a buyer and a seller. The issue is the price at which the transaction takes place. In general, if a company is doing well, the price goes up, and if it's doing poorly, the price goes down. (Subject to all sorts of complexities and special cases, of course.) – Jay Mar 1 '17 at 16:36
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Yes, the price of a stock is what investors think the value of a stock is, which is not tied to profits or dividends by any rigid formula. But to say that therefore the price could be high even though the company is doing very poorly is hypothetically true, but unlikely in practice.

Consider any other product. There is no fixed formula for the value of a used car, either. If everyone agreed that a rusting, 20-year old car that doesn't run is worth $100,000, then that's what it would sell for. But that's a pretty big "if" at the beginning of that sentence.

If the car had been used in some hit TV show 20 years ago, or if it was owned by a celebrity, or some such special case, maybe a rusting old car really would sell for $100,000. Likewise, a stock might have a price higher than what one would predict from its dividends if some rich person wanted to buy that company because the brand name brings back nostalgic memories from his youth and so he drives the price up, etc.

But the normal case is that, in the long term, the price of a stock tends to settle on a value proportional to the dividends that it pays. Or rather, and this is a big caveat, the dividends that investors expect it to pay in the future. And then adjusted for all sorts of other factors and special situations, like the value of the company if it was to be liquidated, etc.

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