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Analysing a stock

Price is not the same as value

The price of a share is what you pay for it today. Its value is what it is actually worth based on the underlying business. The two are related but often differ, and telling them apart is at the heart of investing.

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Price is set moment to moment by buyers and sellers, and it can be pushed around by news, mood and short-term events. Value is a slower, more considered idea: an estimate of what a business is really worth, based on things like its profits, growth prospects and financial strength. When many people are excited, prices can rise well above a sensible estimate of value, and when fear takes over, prices can fall well below it.

This gap is why a falling price does not always mean an investment has become worse, and a rising price does not always mean it has become better. A good business can be a poor investment if you pay far too much for it, and an ordinary business can be a reasonable one if the price is low enough. Tools that estimate a fair value, such as the value estimates on this site, are attempts to judge worth independently of the current price so the two can be compared.

No estimate of value is ever exact, because it depends on assumptions about an uncertain future. The point is not to find a perfect number, but to develop the habit of asking whether a price looks reasonable in relation to what you are actually buying, rather than simply following the crowd.

This content is general information, not investment advice.