How much do big firms and investors affect the stock market?
"It's not either or.  Much of the time the value of the stock has some tangible relation to the financial prospects of the company. The value of Ford and GM stock rose when they were selling a lot of cars, and collapsed when their cars became unpopular. Other companies (Enron for example) frankly 'cook the books' to make it appear they are prospering, when they are actually drowning in debt and non-performing assets. So called ""penny stocks"" have both low prices and low volumes and are susceptible to ""pump and dump"" schemes, where a manipulator buys a bunch of the stock, touts the stock to the world, pointing to the recent increase in price. They then sell out to all the new buyers, and the price collapses.  If you are going to invest in the stock market it's up to you to figure out which companies are which." "The price of a company's stock at any given moment is established by a ratio of buyers to sellers.  When the sellers outnumber the buyers at a given price, the stock price drops until there are enough people willing to buy the stock to balance the equation again.  When there are more people wanting to purchase a stock at a given price than people willing to sell it, the stock price rises until there are enough sellers to balance things again.  So given this, it's easy to see that a very large fund (or collection of very large funds) buying or selling could drive the price of a stock in one direction or another (because the sheer number of shares they trade can tip the balance one way or another).   What's important to keep in mind though is that the ratio of buyers to sellers at any given moment is determined by ""market sentiment"" and speculation.  People selling a stock think the price is going down, and people buying it think it's going up; and these beliefs are strongly influenced by news coverage and available information relating to the company.  So in the case of your company in the example that would be expected to triple in value in the next year; if everyone agreed that this was correct then the stock would triple almost instantly.  The only reason the stock doesn't reach this value instantly is that the market is split between people thinking this is going to happen and people who think it won't.   Over time, news coverage and new information will cause one side to appear more correct than the other and the balance will shift to drive the price up or down.  All this is to say that YES, large funds and their movements CAN influence a stock's trading value; BUT their movements are based upon the same news, information, analysis and sentiment as the rest of the market.  Meaning that the price of a stock is much more closely tied to news and available information than day to day trading volumes.  In short, buying good companies at good prices is just as ""good"" as it's ever been.   Also keep in mind that the fact that YOU can buy and sell stocks without having a huge impact on price is an ADVANTAGE that you have.  By slipping in or out at the right times in major market movements you can do things that a massive investment fund simply cannot."
"@jlowin's answer has a very good discussion of the types of PE ratio so I will just answer a very specific question from within your question: And who makes these estimates? Is it the market commentators or the company saying ""we'd expected to make this much""? Future earnings estimates are made by professional analysts and analytical teams in the market based on a number of factors. If these analysts are within an investment company the investment company will use a frequently updated value of this estimate as the basis for their PE ratio. Some of these numbers for large or liquid firms may essentially be generated every time they want to look at the PE ratio, possibly many times a day. In my experience they take little notice of what the company says they expect to make as those are numbers that the board wants the market to see. Instead analysts use a mixture of economic data and forecasting, surveys of sentiment towards the company and its industry, and various related current events to build up an ongoing model of the company's finances. How sophisticated the model is is dependent upon how big the analytics team is and how much time resource they can devote to the company. For bigger firms with good investor relations teams and high liquidity or small, fast growing firms this can be a huge undertaking as they can see large rewards in putting the extra work in. The  At least one analytics team at a large investment bank that I worked closely with even went as far as sending analysts out onto the streets some days to ""get a feeling for"" some companies' and industries' growth potential. Each analytics team or analyst only seems to make public its estimates a few times a year in spite of their being calculated internally as an ongoing process. The reason why they do this is simple; this analysis is worth a lot to their trading teams, asset managers and paying clients than the PR of releasing the data. Although these projections are ""good at time of release""  their value diminishes as time goes on, particularly if the firm launches new initiatives etc.. This is why weighting analyst forecasts based on this time variable makes for a better average. Most private individual investors use an average or time weighted average (on time since release) of these analyst estimates as the basis for their forward PE." "The correlation I heard most about in economics/finance was that stock prices and bond yields were negatively correlated; as the stock market does better, bond yields fall (company's doing well as evidenced by stocks, so it's a good credit risk, so YTM of its bonds on the market goes down). The correlation, if any, between the stock and futures market should be visible in the actual price histories. Index prices may be useful, but what's more likely is that various future prices have correlation with various companies' stocks. Where the future reflects the price of a raw material that is a significant cost of goods sold for a company, you'll see these two move inversely to each other in the short term. I think that if there is a causative relationship here, its that futures prices influence stock prices, not the other way around. The futures market generally represents the cost side of a consumer goods producer's bottom line. The stock market represents its profits. As futures go up, profit expectations go down, putting pressure on stock prices. Industries that deal in services, or in other types of goods, can still be affected because a rise in the cost of something consumers need will cause them to spend less on other things which affects margins in those other areas. So, in the short and medium term, when the futures market goes up the stock market sees a dip, and vice versa.  However, companies adapt; they can put upward pressure on prices for their goods to restore their desired margins, usually by slowly increasing them to prevent sticker shock (though elasticity of demand plays a part; the more we need something no matter what it costs, the faster prices can increase). To maintain costs, they can make things cheaper using less expensive materials (more plastic, less steel). They can restructure production processes (translated: move factories offshore, or at least to ""right-to-work"" states with less union strength) to save costs elsewhere. All of these reduce costs and thus increase profits, but take time to implement. Many of these things reduce direct costs, reducing demand for the commodity and causing the futures prices to go back down. So, over the long term, these differences even out, and it's down to the things that affect the entire market (inflation, consumer/investor confidence, monetary policy)." "My question boiled down: Do stock mutual funds behave more like   treasury bonds or commodities? When I think about it, it seems that   they should respond the devaluation like a commodity. I own a quantity   of company shares (not tied to a currency), and let's assume that the   company only holds immune assets. Does the real value of my stock   ownership go down? Why? On December 20, 1994, newly inaugurated President Ernesto Zedillo   announced the Mexican central bank's devaluation of the peso between   13% and 15%.  Devaluing the peso after previous promises not to do so   led investors to be skeptical of policymakers and fearful of   additional devaluations. Investors flocked to foreign investments and   placed even higher risk premia on domestic assets. This increase in   risk premia placed additional upward market pressure on Mexican   interest rates as well as downward market pressure on the Mexican   peso.  Foreign investors anticipating further currency devaluations   began rapidly withdrawing capital from Mexican investments and selling   off shares of stock as the Mexican Stock Exchange plummeted. To   discourage such capital flight, particularly from debt instruments,   the Mexican central bank raised interest rates, but higher borrowing   costs ultimately hindered economic growth prospects. The question is how would they pull this off if it's a floatable currency.  For instance, the US government devalued the US Dollar against gold in the 30s, moving one ounce of gold from $20 to $35.   The Gold Reserve Act outlawed most private possession of gold, forcing   individuals to sell it to the Treasury, after which it was stored in   United States Bullion Depository at Fort Knox and other locations. The   act also changed the nominal price of gold from $20.67 per troy ounce   to $35. But now, the US Dollar is not backed by anything, so how do they devalue it now (outside of intentionally inflating it)?  The Hong Kong Dollar, since it is fixed to the US Dollar, could be devalued relative to the Dollar, going from 7.75 to 9.75 or something similar, so it depends on the currency. As for the final part, ""does the real value of my stock ownership go down"" the answer is yes if the stock ownership is in the currency devalued, though it may rise over the longer term if investors think that the value of the company will rise relative to devaluation and if they trust the market (remember a devaluation can scare investors, even if a company has value). Sorry that there's too much ""it depends"" in the answer; there are many variables at stake for this.  The best answer is to say, ""Look at history and what happened"" and you might see a pattern emerge; what I see is a lot of uncertainty in past devaluations that cause panics." "First of all, the annual returns are an average, there are probably some years where their return was several thousand percent,  this can make a decade of 2% a year become an average of 20% . Second of all, accredited investors are allowed to do many things that the majority of the population cannot do. Although this is mostly tied to net worth, less than 3% of the US population is registered as accredited investors. Accredited Investors are allowed to participate in private offerings of securities that do not have to be registered with the SEC, although theoretically riskier, these can have greater returns. Indeed a lot of companies that go public these days only do so after the majority of the growth potential is done. For example, a company like Facebook in the 90s would have gone public when it was a million dollar company, instead Facebook went public when it was already a 100 billion dollar company. The people that were privileged enough to be ALLOWED to invest in Facebook while it was private, experienced 10000% returns, public stock market investors from Facebook's IPO have experienced a nearly 100% return, in comparison. Third, there are even more rules that are simply different between the ""underclass"" and the ""upperclass"". Especially when it comes to leverage, the rules on margin in the stock market and options markets are simply different between classes of investors. The more capital you have, the less you actually have to use to open a trade. Imagine a situation where a retail investor can invest in a stock by only putting down 25% of the value of the stock's shares. Someone with the net worth of an accredited investor could put down 5% of the value of the shares. So if the stock goes up, the person that already has money would earn a greater percentage than the peon thats actually investing to earn money at all. Fourth, Warren Buffett's fund and George Soros' funds aren't just in stocks. George Soros' claim to fame was taking big bets in the foreign exchange market. The leverage in that market is much greater than one can experience in the stock market. Fifth, Options. Anyone can open an options contract, but getting someone else to be on the other side of it is harder. Someone with clout can negotiate a 10 year options contract for pretty cheap and gain greatly if their stock or other asset appreciates in value much greater. There are cultural limitations that prompt some people to make a distinction between investing and gambling, but others are not bound by those limitations and can take any kind of bet they like." Also keep note - some companies have a combined CEO/Chairman of the board role. While he/she would not be allowed to negotiate contracts or stock plans, some corporate governance analysts advocate for the separation of the roles to remove any opportunity for the CEO to unduly influence the board.  This could be the case for dysfunctional boards. However, the alternate camps will say that the combined role has no negative effect on shareholder returns.   SEC regulations require companies to disclose negotiations between the board and CEO (as well as other named executives) for contracts, employee stock plans, and related information. Sometimes reading the proxy statement to find out, for example, how many times the board meets a year, how many other boards a director serves on, and if the CEO sits on any other board (usually discouraged to serve on more than 2) will provide some insight into a well-run (or not well-run) board. Yes, yes - that's my point. The common investors never did invest (or even get to invest) so they didn't lose money as the article claims. It's the idiot institutional funds that got screwed.   Common investors - most of them - knew FB was overvalued. 1) Explicitly, how a company's share price in the secondary market affects the company's operations. (Simply: How does it matter to a company that its share price drops?) I have a vague idea of the answer, but I'd like to see someone cover it in detail.  2) Negative yield curves, or bonds/bills with negative yields  Thanks! There are not necessarily large shareholders, maybe every other Joe Schmoe owns 3 or 5 shares; and many shares might be inside investment funds. If you are looking for voting rights, typically, the banks/investment companies that host the accounts of the individual shareholders/fund owners have the collective voting rights, so the Fidelity's and Vanguard's of the world will be the main and deciding voters. That is very common.