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What Determines a Stock Price?
Mary McMahon
Mary McMahon
There are several factors that influence stock price, depending on whether one is talking about valuation at the time of an initial public offering or ongoing price fluctuations on the secondary market. Stock prices are dependent on the value of a company, current economic conditions, and willingness on the part of investors to pay. As many people who follow the market are aware, stock prices can be extremely volatile.
At an initial public offering, a company decides to start selling shares in itself to members of the public. A detailed analysis is done to determine the company's market capitalization, how much the company is worth. This is divided by the number of shares that will be offered to determine the price for each share. Usually, an underwriter purchases the stock and then sells it on the open market. Almost immediately, investor demand starts to play a role in the stock price. Investment banks can decide to sell an initial public offering at a premium, demanding more than the estimated share value, if there is a lot of interest in the stock.
Once on the secondary market where investors buy and sell from each other, there are a lot of things that can come into play when it comes to pricing stocks. One is the fortunes of a company. Companies that are making money, declaring record earnings, and offering dividends on their stocks will have stock of a higher value. If a company appears in trouble, as might be the case when products have to be pulled from the market and when earnings drop, the stock price will fall.
Supply and demand are also important. If demand is high, with many people looking to buy stock, the stock price will be higher because sellers can afford to be choosy. When there is a glut of supply, on the other hand, the stock price tends to drop because buyers can pick and choose from the lowest prices they are offered. Some companies attempt to control supply and demand by recalling stock to reduce the amount floating on the market, thereby keeping supplies limited and promoting a higher stock price.
Stock fluctuations can also occur in response to general economic or industry trends. When the economy is depressed, stock prices drop. Likewise, companies in industries that are struggling will often have lower stock values. Investors look at a wide variety of factors when determining how much they want to pay for stocks, and ultimately, stock prices are predicated by how much investors think a given stock is worth.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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![Stock prices can change depending on the economy, a corporate crisis, or other factors.]()
By: leungchopanStock prices can change depending on the economy, a corporate crisis, or other factors.
Discussion Comments
I think the volatility in the market is what draws some people, and scares other people away.
When I look at historical stock prices, I can see how people could have made and lost a lot of money on stocks through the years.
I know a few people who are active traders and they say it is much different than it was years ago. It used to be that you could buy shares of a strong company and hold them for many years. The price of the stock would go higher, dividends were paid, and many times there were stock splits as well.
They would hold the stock through the good times and the bad, but overall, their portfolio would continue to increase.
Now it seems like most of the traders I know don't plan to stay with a company for years like that. They have more of a shorter term strategy when it comes to buying their stocks.
I don't know how anyone can try and predict what the future price of a stock will be. It seems like the economic conditions have not been very good lately, and that has really had a negative effect on the price of most stocks.
I wish I had invested in shares of Apple stock many years ago. I don't follow a lot of stocks, but that stock is one that keeps performing well.
With supply and demand affecting the price of a stock, you can see how demand for Apple products continues to grow.
I see the same thing for the price of Google stock. I have no idea what the price of this stock was at their initial public offering, but it would have been much, much lower than where it is trading now.
If someone had bought either Apple or Google when they were young companies, and held on to their shares, they would have a lot of money right now.
I think it would be hard to know when to sell a stock that was doing so well like that. Once I doubled my money I would probably be tempted to sell it. Then it would be pretty frustrating to watch the stock price keep going higher.
I used to follow the market and traded a few stocks here and there, but I quickly found out that I wasn't very good at it.
I am not much of a risk taker and don't like losing money. For me, there is too much risk involved with trading stocks and I was too nervous about it.
A few years ago, I had a stock ticker streaming across the bottom of my computer screen all day long. Now when I see a stock price quote of a particular company shown on the news, I don't pay nearly as much attention as I used to.
I used to know where many of the major technology stocks were trading. Since I don't follow them anymore, I don't even know if a certain stock price would be considered high or low.
I first became interested in the stock market when I started working in the investments department of a bank. I found this very interesting, and soon began following the market on a daily basis.
One thing that I have noticed when following certain stocks, is that most current stock prices will follow the overall trend of the market.
If the market is not doing very well and has a lot of down days, most of the stocks I own seem to follow this general trend. A few of them might fight the trend for awhile if they are really strong stocks, but eventually they seem to drop in price too.
I have heard many people say it isn't wise to fight the trend. After keeping a close eye on stock prices every day, I can see how this is really true.
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