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How is Stock Price Determined?

•6 min read•by Angel One
Stock prices are fundamentally determined by real-time supply and demand on the exchange, fluctuating based on immediate trading activity and the collective perception of a company's worth
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Every stock in the market has a price tag, but the price is not static. It depicts the collective sense investors have of a company, i.e., how much they think the company is worth at the time. Market conditions, investor sentiment, company performance, and economic factors all play a role in determining this value. Understanding how stock prices are determined can help investors make smarter, more informed trade decisions. 

Key Takeaways

  • Stock prices vary depending on the real-time market demand and supply. 

  • Intrinsic value is useful to investors in determining whether a stock is overvalued or undervalued. 

  • Methods such as DCF, DDM, and Relative Valuation help determine fair value. 

  • Factors such as management, liquidity, and policies affect share prices. 

What Is a Stock Price?   

A stock price, share price, or market price is the price that investors are willing to pay for one share in a company at any given time. It is a constantly changing number that fluctuates according to supply and demand, investor sentiment, and market conditions. This price is the market's perception of a company's performance, profitability, and growth potential. 

For investors, knowing what a stock price is very important when making informed investment decisions. It helps evaluate how the market perceives a company's value, identify opportunities, and analyse price trends. However, a stock price is not always indicative of a company's intrinsic value; it should be analysed alongside financial ratios and fundamental indicators. 

How are Stock Price Determined in India?  

The Indian stock market is incredibly volatile; therefore, if you are questioning how are Stock price determined in India, then this depends on several factors that have an impact on investors' perception and company performance. 

  1. Liquidity 

Liquidity measures the ability to trade shares. When liquidity is high, buying and selling become smoother, which increases investor interest. However, a lack of liquidity tends to stagnate the prices since there are no buyers. 

  1. Policy and Regulations Changes 

Government policies and regulatory decisions affect stock movements. For example, budget announcements or policy changes in industries such as insurance or banking can have an immediate effect on their stocks. 

  1. Political Scenario 

Political stability and changes in government directly affect investor confidence. Elections, new policies, or reforms can cause market flows. 

  1. Other Factors 

Management announcements, natural disasters, and specific company announcements, such as dividend declarations, mergers, or reports of fraud, also influence share prices. Thus, the process of determining stock prices comprises internal and external factors that impact the value of the stock market. 

Determining the Intrinsic Value of the Stock 

To determine whether a stock is overpriced or underpriced, you must determine its fair or intrinsic price. Intrinsic value (or IV) plays a critical role in decision-making and assists investors in calculating returns. 

Various critical internal and external factors influence the stock price in the market. New developments in the company, demand and supply components, macroeconomic conditions, etc. affect the stock price. It implies that the stocks trading on the bourses are not always fairly priced. 

Buying stocks at their fair price will give you better returns on investments. However, if you are not aware of the fair price of the stock, you may end up paying a higher price. IV helps you gauge the difference between the stock's correct price and its market-influenced value. 

Methods to Determine the Intrinsic Value 

The three most popular ways to determine the intrinsic value of stock are stated below. 

  1. Dividend discount model 

The method uses the total present value of all the company's future dividends. If the calculated stock prices are higher than the present value of the future dividends, the stock is undervalued. Similarly, the stock is overpriced if the opposite scenario plays out. 

Here is the process for calculating IV using the DDF share price formula. 

IV=EDPS(r-g) + present value of the expected selling price of the stock 

EDPS= Expected dividend per share 

R= the cost of equity capital 

G= the dividend growth rate 

  1. Discounted cash flow 

The DCF method calculates the intrinsic value of a stock by taking into account the future cash flow generated by the company. 

Discounted cash flow =CF1(1+r)1 +CF2(1+r)2+.....+CFn(1+r)n+terminal value of the business 

CF=cash flow 

r= the rate of discount 

  1. Relative Valuation Method 

The relative valuation method compares the stock price with the company’s fundamentals, like revenue, net income, profit, PR ratio, and the book value of the equity share with its peers.  When the PE ratio of the stock is lower than the industry average PE, the stock is available at a cheaper rate.  

How the Share Price is Decided 

With an understanding of a stock’s intrinsic value, let’s now consider the other factors responsible for determining its price in the market. 

When company stocks are available for trading, sellers quote a price at which they will sell the stocks. Conversely, the buyers also quote their price. The trade happens only when both parties agree. When a buyer offers a higher price, the seller agrees to it, and the share price rises. But what makes the buyer’s offer? 

1. The attractiveness of the industry 

Buyers pay a higher price if they believe the stock will earn a higher return. So, companies on the growth path attract more buyers for their shares. The basis of the decision depends on the factors stated below - 

  • If new competition is entering the sector 

  • The future scope of growth 

  • The company enjoys authority over determining the value of its products  

2. Performance   

Investors will invest in companies that are performing well. If the company is on a growth path, generating good returns on investment, has a sustainable business model, good management, and maintains good liquidity, the share price will be its share price. 

3. Management  

The role of the management can sway investors' sentiments. The company’s management profile and leadership affect the stock price. An announcement or commentary by the management will have an immediate effect on the stock price. 

4. Major changes in the business, management and policy 

The stock price can increase if there are any management changes, especially if investors believe the changes to be positive. 

Similarly, changes in government policies and regulations also affect stock prices because changes in the law will impact the company’s business model. For example, if the government announces an increase in foreign investment in the sector, the company's share price might rise. 

5. Liquidity 

Liquidity indicates the quantity of stock that is in demand in the market. If the stock is highly liquid, it is easier for the sellers to sell. It also affects the stock price, as buyers are more willing to buy these shares when there are many buyers and sellers available. 

6. Monopoly powe

Companies with a competitive advantage over peers will enjoy a higher share price than others.  When a company is in a near monopoly industry,  it is protected from competition - therefore, it can exercise better control over product prices and customers.  Because of their special position in the segment, these company stocks generate substantial profits, which in turn increase the stock price. Therefore, companies with monopolies or strong market shares can enjoy higher share prices. 

Factors That Affect Multiple Stock 

The following are the factors that affect not just one stock but stocks across a sector or even across the economy as a whole , at once- 

  1. Interest rates 

  1. Changes in economic policies 

  1. Inflation 

  1. Deflation 

  1. Market sentiment 

  1. Industry trades 

  1. Global fluctuations 

  1. Natural disasters 

Why Do Stock Prices Change after Hours or Over the Weekend? 

Stock prices may be affected even when markets are officially closed due to after-hours trading and global events. After-hours trading is done to buy or sell shares after the normal market session is closed. This trading takes place via electronic communication networks (ECNs), where prices may vary due to limited liquidity and smaller trading volumes. 

And specifically, corporate announcements, like earnings announcements, mergers or policy changes, all frequently occur outside of the session hours, affecting investor sentiment prior to the next session. Tensions in the global geopolitical climate, recent interest rate announcements, or economic indicators from other countries can also change investor appetites. 

Over the weekend, the market participants conduct their analysis, and this weekend's analysis guides the pre-market adjustment when trading resumes the following day. Therefore, stock prices still reflect real-time reactions to the news, so that markets open in accordance with the latest economic and world developments. 

Conclusion 

Understanding how stock prices are determined is essential for anyone investing in the market since it’s a measure of the value that investors are willing to pay. This value is constantly changing due to the reaction of buyers and sellers to economic indicators, the effectiveness of companies and investor sentiment. With a clear understanding of this impact, you can make better decisions about your stock investments. 

FAQs

The stock price is determined by the forces of demand and supply in real-time. The real-time stock price on a stock exchange reflects the price of the trade at which the maximum number of shares have been transacted by the market participants.
A share price, also called stock price, is the cost of buying one share in a company. This share price fluctuates as per the market conditions and is determined on a real-time basis by a stock exchange.
You can see share prices online through the official stock exchange websites, such as NSE and BSE. Else, you can check prices on the broker’s website with whom you have opened your Demat account. We recommend checking prices on AngelOne’s website.
In the case of an IPO, the share price is determined by the company. Post listing, the share price on a stock exchange will be determined based on the matching of bid and ask prices from the buyers and sellers, respectively.
To calculate the share price after bonus shares have been issued, the total value of the company before its bonus issue should be divided by the total number of shares outstanding after the bonus issue.

The balance between supply and demand is one of the important factors affecting stock prices. When demand is greater than supply of a stock, the price is likely to increase. On the other hand, if a higher number of investors sell (compared to investors willing to buy), prices fall.  

Economic factors such as GDP growth, inflation, interest rates, and employment figures affect company valuations. Strong economic data boosts investor confidence, leading to higher stock prices. In contrast, poor indicators can cause fear of slower growth and a decline in prices. 

Positive sentiment, often sparked by good earnings or economic optimism, leads to an increase in buying, which raises stock prices. Negative sentiment that's fueled by uncertainty or bad news can be a source of panic selling and market declines.  

Market analysts use financial models, technical charts, and basic data to predict future Stock Price trends. They weigh earnings reports, industry growth and market psychology and make predictions. 

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