====== Price ======
Price is the amount of money required to purchase a financial [[asset]], such as a share of a [[stock]]. While it’s the number you see flashing on your screen, it is critically different from [[value]]. As the legendary investor [[Warren Buffett]] famously said, "Price is what you pay; value is what you get." The [[market price]] is simply the most recent point of agreement between a buyer and a seller, a momentary snapshot of the market’s mood. It can be influenced by a flood of factors, from breaking news and analyst chatter to raw crowd emotion. For a follower of [[value investing]], this distinction is everything. Price is a fickle, often irrational figure dictated by the whims of the market. Value, on the other hand, is an estimate of a business's true, underlying worth. The art of investment lies in exploiting the frequent and sometimes massive gaps between the two.
===== The Dance of Price and Value =====
To truly grasp the relationship between price and value, look no further than the brilliant allegory of [[Mr. Market]], created by the father of value investing, [[Benjamin Graham]].
Imagine you are partners in a business with a fellow named Mr. Market. He is the most bipolar business partner you could ever imagine. Every single day, he comes to your office and offers to either buy your share of the business or sell you his. The catch? The price he quotes is entirely dependent on his mood.
  * When he’s ecstatic and sees nothing but a rosy future, he’ll offer you a ridiculously high price for your shares.
  * When he’s in the depths of despair, convinced the world is ending, he’ll offer to sell you his shares for pennies on the dollar.
The best part is, you are under no obligation to trade with him. You can happily ignore his manic-depressive offers. A value investor uses Mr. Market's mood swings to their advantage. They ignore his euphoria and patiently wait for his pessimism to create a bargain price—an opportunity to buy a great business for far less than it’s actually worth.
===== What Makes the Price Tag? =====
A stock's price is not set by some grand committee; it’s the result of millions of individual decisions playing out in real-time. The primary drivers are a mix of hard economics and very human psychology.
==== Supply and Demand ====
At its core, the stock market is a giant auction. The price of a stock moves based on the balance of [[supply and demand]].
  * If there are more people who want to buy a stock (demand) than there are people willing to sell it (supply), the price will be bid up.
  * Conversely, if more people are trying to sell than buy, the price will fall.
The amount of buying and selling activity is measured by [[trading volume]]. High volume means lots of people are interested, which can sometimes lead to more volatile price swings.
==== The News and Noise Machine ====
Short-term price movements are often driven by new information, or what investors //perceive// as new information. A company’s [[quarterly earnings]] report, an analyst upgrade, a news story about a competitor, or macroeconomic data like [[inflation]] figures and [[interest rates]] can all send prices soaring or tumbling. The challenge for an investor is to distinguish between "news" that fundamentally changes a company's long-term value and "noise" that only causes a temporary panic or frenzy.
==== Human Psychology ====
Markets are made of people, and people are not always rational. The field of [[behavioral finance]] studies how psychological biases lead to irrational financial decisions. The two most powerful emotions in the market are fear and greed.
  - **Greed** can inflate asset prices far beyond their fundamental worth, creating dangerous [[market bubbles]].
  - **Fear** can cause panic selling, leading to [[market crashes]] where prices plummet to absurdly low levels.
An intelligent investor recognizes that the market price is often just a reflection of the crowd’s current emotional state.
===== A Value Investor's Perspective on Price =====
For a value investor, price is not a signal of quality. A high price doesn't necessarily mean a company is great, and a low price doesn't mean it's terrible. Instead, price is the most important variable in the investment equation.
==== Price as Your Entry Ticket ====
The goal is to buy a wonderful business at a fair price, or, even better, a fair business at a wonderful price. The difference between a company’s estimated [[intrinsic value]] and the price you pay for its stock is your [[margin of safety]]. This is the bedrock concept of value investing. Buying a stock for significantly less than you think it's worth provides a cushion against errors in your analysis, unforeseen problems, or just plain bad luck. The lower the price, the larger your margin of safety and the higher your potential for future returns.
==== Don't Chase the Price ====
A common mistake for new investors is to become obsessed with watching daily price movements. This is a surefire way to make emotional, and likely poor, decisions. Your focus should be on the quality of the underlying business, not the flickering ticker. If you have done your homework and bought a slice of a great company at a discount, the short-term gyrations of the market are nothing more than Mr. Market having one of his fits. Sit back, relax, and let the value of the business do the heavy lifting over the long term.