How Are Stock Prices Determined?

By Dan Crimmins on January 7, 2015 in Behavioral Factors in Investing

collective knowledge of stock market participants are similar to everyone guessing how many jelly beans are in the jar.

This is a video post created by our partner Dimensional Fund Advisors (DFA). As a NJ DFA advisor, we are strong believers in the DFA investment philosophy and wrote about the reasons in this post: Why Do We Use DFA?

In this 2-1/2 minute video, DFA explains how security prices are set—and change—based on the collective knowledge of buyers and sellers. Armed with this information, investors can be more confident about the power of the financial markets.

The video opens with a quote from recent Noble Prize winner Professor Gene Fama:

In an efficient market, prices fully reflect available information.

Every trade has a buyer and seller. Ask yourself these two questions before every trade,

What does the seller/buyer know that I don’t?

Who is the other counterparty to this transaction?

There was a famous NY area department store which used to run a television ad with the slogan, “The more you know, the more you will save.” With investing, the television slogan for investors should be:

The more you know, the less you will trade.

Click on the words to the right to begin this video: THE POWER OF THE MARKETS

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The foregoing content reflects the opinions of Crimmins Wealth Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.