Markets in a Minute
Stock Value vs. Price: What’s the Difference?
This infographic is available as a poster.
This infographic is available as a poster.
Stock Value vs. Price: What’s the Difference?
From the Dutch Tulip Mania of the 17th century to the Roaring Twenties, asset bubbles have cropped up in markets persistently.
The recent activity in GameStop and other securities are no exception. But what does this mean for investors today? To answer this question, we return to a key principle of investing: the difference between a stock’s price versus its value.
This Markets in a Minute chart from New York Life Investments shows the key forces that impact both price and value to help investors harness a deeper understanding of their investments.
What Determines a Stock’s Value?
A company (represented by a stock) derives its value from fundamental factors including:
Earnings
Earnings, or profitability, is often an indicator of company performance. Past and present numbers indicate a company’s profitability thus far, while future earning projections help investors gauge potential performance going forward. This is germane to investors because a company will typically reinvest its earnings into the business or distribute them as dividends to investors.
Market Share
Companies with strong market share possess economic moats, which create a barrier against competitors. These moats can protect a company from new market entrants or allow for cost advantages, increasing the company’s value to investors.
P/E ratio and Other Metrics
The price-to-earnings (P/E) ratio is a common metric for valuing companies. It measures a company’s price in relation to its earnings per share (EPS). If a company has a low P/E ratio compared to its peers, this may suggest that it is undervalued.
Here are common metrics used to value a stock:
| Metric | Formula | Purpose |
|---|---|---|
| P/E ratio | Price/Earnings Per Share | Compares a company’s stock price relative to its earnings |
| P/B ratio | Price/Book Value Per Share | Compares a company’s stock price relative to its tangible net asset value |
| Debt-to-equity ratio | Total Liabilities/Total Shareholders’ Equity | Shows company leverage, or the extent that a company is financing operations through debt |
Competitors (Current and Potential)
Comparing a company against its peers can indicate its relative strength. An investor may discover value discrepancies between competitors, presenting potential investment opportunities.
What Determines a Stock’s Price?
A stock’s price, on the other hand, is typically influenced by a separate set of factors:
Investor Demand
Supply and demand is central to determining the price of a stock. When an influx of market participants are buying a stock, the market price will rise. If the number of sellers for a stock exceeds the number of buyers, the price may drop.
Broad Market Trends
Bull and bear markets are examples of primary markets, which may influence a stock’s price performance. Rallies or directional turnarounds are other types of shorter market trends which often last between two to eight weeks.
Media and Analyst Reports
When a company faces a controversy, media reports may influence investor behavior, causing them to sell. Conversely, a strong analyst rating may influence investors to buy.
Economic Factors
Across asset classes, six macroeconomic factors have been shown to explain 90% of a stock price’s movements: real rates, economic growth, liquidity, inflation, emerging markets, and credit.
Company News
When a company releases quarterly earnings reports, it may influence investor demand. If Apple’s company’s earnings exceed expectations, for instance, its stock price may consequently rise after the announcement.
In the short term, many of the variables that influence a stock’s price are driven by external forces. But in the long term, fundamental factors such as profit margins or earnings, often play a bigger role.
Forest For the Trees
With the above factors in mind, investors are better equipped to recognize the driving forces that underscore a stock’s price and value, especially in the face of volatility and market exuberance.
By knowing these core differences, investors will not only get a better awareness of their portfolios, but will learn how to make more rational investment decisions.
Markets in a Minute
The Average American’s Financial Portfolio by Account Type
From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.
The Average American’s Financial Portfolio by Account Type
Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.
In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.
Breaking Down a Typical Financial Portfolio
People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.
| Account Type | % of Financial Portfolio |
|---|---|
| Employer retirement plan | 38% |
| Bank account | 23% |
| Brokerage/investment account | 14% |
| Traditional IRA | 10% |
| Roth IRA | 7% |
| Crypto wallet/account | 4% |
| Education savings account | 3% |
| Other | 1% |
Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.
Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.
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Account Insight for Advisors
Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).
Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.
The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.
Markets in a Minute
5 Factors Linked to Higher Investor Engagement
Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?
5 Factors Linked to Higher Investor Engagement
Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?
In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.
Influences on Investor Engagement
Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.
| Factor | Investor Engagement Index Score (Max = 100) |
|---|---|
| Financial advisor relationship | Don’t work with financial advisor: 63 |
| Work with financial advisor: 70 | |
| Sustainability alignment | No actions/alignment: 63 |
| Some/full alignment: 74 | |
| Trust in AI | Low trust: 61 |
| High trust: 74 | |
| Risk tolerance | Conservative: 62 |
| Aggressive: 76 | |
| Comfort making investment decisions | Low comfort: 42 |
| High comfort: 76 |
Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.
On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.
The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).
Personalizing Experiences Based on Engagement
Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.
On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).
The Average American’s Financial Portfolio by Account Type
5 Factors Linked to Higher Investor Engagement
The Top 5 Reasons Clients Fire a Financial Advisor
The Top 5 Reasons Clients Hire a Financial Advisor
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