Question

Determine whether stock prices are affected more by long-term or short-term performance. Provide an example of the effect that supports your claim.

Answer 1

Short term can perform better.

Step-by-step explanation:

In the market, the performance of the stock is a very important and critical barometer that determines the company's health. The stock price of a company helps the investors to evaluate the earnings and the growth of his in the future.

Both short term and the long term performances of the company impacts the stock performance of the company. The stock price can both rise and fall in a short term performance or a long term performance.

However, for a short term performance, things are very volatile and there can be a lot of fluctuations in the stock prices. While a long term performance is smooth and is not volatile.

For example,

Suppose ABC Company decides to give a $2 dividend for one share (DPS) next year and we estimate this to increase by 6 percent per year thereafter. Now let us assume that the required rate of the return on the ABC Company stock is 10%. So currently, ABC Company stock is at a trading value of $12 for one share. So using the formula, now we can find the intrinsic value of 1 share of ABC Company stock is:

`$(2.00)/(0.10-0.05)$`

= $40

Thus, ABC company stock is $40 for one share and now it is trading at a value of 12 dollar.

Thus from the above example, we can say that in short term, the stock can perform better.