Cost, Price and Value of stocks:
Investors dealing in stock market often use terms like cost, price and value as synonyms although they are quite different from one another. Any two of them could be same at a given point of time but are unlikely to be at the same level for too long.
Price: Price of a stock is the rate at which the stock is being traded or last traded on stock market. This price may or may not change throughout the trading session owing to varying expectations from participants about the same company, though are based on the same set of facts. Therefore price is what market gives to any stock. This can change on any day at any time without owner’s permission or participation. Several thousand buyers and sellers across the whole country participate in bidding process to help determine price at any given point of time. Price is about past.
Now let us come to Cost. Cost is the price one pays to buy stocks. If an investor buys more than one share, he may have succeeded in buying all of them at the same price or at different rates. Dividing the total amount paid by investor with number of shares bought will give him his cost per share. Cost is unique to every investor and is known only to him/her. Cost price of your stocks will have little bearing on the price discovery process in market. Cost is therefore the price you pay to buy your stock. Cost is more about present since it is fixed at the time of one’s buying stocks.
Value, by contrast is what a stock ought to be priced at according to the person attempting to assign value. The value one assigns may change when new information becomes public. Value assigned may also change due to factors that have no direct bearing on the working of the company. Since too many variables play a part in assessment, no two analysts or investors may have the same value assigned to stocks at the same time. Validation of values assigned in the past must be undertaken to assess the ability of the person(s) assigning values. In order to defend themselves when the predictions go completely wrong, analysts often put several ifs and buts in their note to work as caveats.
As you must have noticed by now, Price is a function of interactions between several buyers and sellers on the floor or electronic screens of exchanges. Cost is more personal in nature and it always differs from person to person. Value is the one at which the person putting it out hopes that the price would reach or should reach. Cost and Value are more personal in nature and are not uniform across all investors. One who is more successful in forecasting values that are eventually getting caught up with live prices will emerge winner in long run. Those who are content in remembering their cost and keep looking at price are unlikely to become winners in long run. Though this section too can benefit by boom conditions in market, they normally burn themselves out in adverse or flat markets with no idea where to look up to.