The supply and demand determine a share price. If the demand is high, it will increase, and if the demand is low, it decreases. Stock prices depend on the bid and ask of the stock. A bid is an offer to buy a certain number of shares for a specific price. An ask is an offer to sell a certain number of shares at a particular price.
Exchanges calculate a stock's price instantly by finding the price at which the maximum number of shares are transacted at the moment. The price changes if there is a change in the buy or sell offer of the shares.
How to calculate the market price of a share?
To determine the market cap of a share, you need to estimate the market price of the share. To figure out how valuable the shares are for traders, take the last updated value of the company share and multiply it by outstanding shares.
Another method to calculate the price of the share is the price to earnings ratio. You can calculate the P/E ratio by dividing the stock price by its earnings in the last 12 months.
The intrinsic value of stock = P/E ratio X Earning per share
Growing companies generally have a higher P/E ratio while established business have slower P/E growth rates.
How is the initial value of shares determined?
Company shares are issued first in the primary market; Initial Public Offer (IPO) for the general public to raise funds for meeting capital requirements. The initial price of the share is determined in IPO, considering the performance and net present value of the firm.
Once the trading starts, the share price will begin fluctuating based on demand and supply of the shares in the secondary market. The prices may increase if there are more buyers for the stock and decrease if there are more sellers.
Which factors affect share prices directly?
1. Supply and demand are the most critical factors that affect the share price directly. If a share is bought more than it is sold, the price will rise because the stake is sought after the demand is more than the supply.
2. A company's earnings and profitability from producing and selling goods and services can also affect its share prices.
3. Behavioural factors of traders and investors in the market can change the price of stocks.
4. If supply and demand are equal, the share prices remain stable with very little increase and decrease in the price. If one of the factors outweighs the other, an abrupt change can be expected.
5. When a company issues new shares for purchase in the market, the number is limited. If a lot of investors are trying to buy these shares, and the supply is low, the shares price will increase.
6. If a company buys back its share from the market, it reduces the number of shares in circulation. Due to the reduced supply, the prices can increase.
Which factors affect the share prices indirectly?
1. Interest rates
2. Changes in economic policies
5. Market sentiment
6. Industry trades
7. Global fluctuations
8. Natural disasters