A Stock Price Is Not a Prediction
Stock prices sometimes tell you what the market thinks will happen. Consider a company that has signed a merger agreement to sell itself for $30 per share in cash. If the stock trades at $29, that suggests that the market thinks the deal will close. If the stock trades at $18, that suggests that the market thinks the deal won’t close. If the stock trades at $31, that suggests that the market thinks someone else will come in and offer more money to buy the company.
Suggests. None of these prices gives you an exact market-implied probability for any particular event. If the stock trades at $28, you might think “well $28 is about 93% of $30, so the market thinks the deal has a 93% chance of closing,” but that is not a very good…
