Have you ever wondered, how share prices are determined? Do you wish to know the factors influencing stocks prices of different companies? What’s the share price formula? If yes, let’s analyse how is share price actually calculated?
How is Share Price Determined?
There was an ancient time wherein we used to exchange goods for goods (barter system). But, today’s world believes and works on price tags. For every goods or products or services, we now determine the exchange policy in “price” or “cost”.
So, speaking of “Price”, as per English dictionary is defined as “an amount of money expected, required, or given in payment for something.”
Nowadays, Price forms the base of every financial or social transaction.
How is Share Price determined?
In a free market model, price is determined on the basis of two important factors: SUPPLY & DEMAND.
Let’s get our economics boots on: to try and explain you the law of supply & demand and the resulting price determination.
What is Demand?
Demand originates with the consumers i.e. they show a desire to purchase a product. On a general basis, the users are willing to pay a particular price for a product depending on their income capability and need to own a product. This relationship in the economic term is expressed as a “demand curve”.
What is Supply?
On the other hand, producers/manufacturers arrange to supply product or services to meet this demand. The higher the demand the company tries to increase its production. This relationship is called a “supply curve”.
The point at which the demand and supply curve intersect is called the “equilibrium price”. And this is how pricing of different goods, commodities, and services, is determined in a similar way.
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Got too much into economics, now let’s try and understand with a daily example:
Everyone loves “Mango” we are sure of it. So, we all know the demand for mangoes is an all-time high. Thus, if you see the pricing trend, at the beginning of the summer when the supply is low: the price is high Rs.100 per kg.
But, during the mid-summer period when more mangoes come into market and supply is high: the price reduces to as low as Rs.40 per kg. But, after the summer is over and mangoes are disappearing from the market, the price resets to Rs.100 or even Rs.200 per kg.
Similarly, stock or share prices are determined by the play in between demand and supply. Thus, higher the demand for a share, the higher is the price and vice versa.
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Share Price Determination: Example
Let’s take a hypothetical example of opening a new company with no market presence and a new offering.
When this organization is opting for their first Initial Public offering (IPO), the demand for the share is lower, but the supply is huge. Thus, price here in this scenario would be low.
Now, once the company starts to progress and shows better returns, the request for company shares starts piling up. Therefore, the share price of the company starts showing an upward trend.
Talking about facts, you might have heard about the success stories for companies like Reliance Ltd., MRF tyres, Rasoi and many many more.
We won’t go in further details, but let us take you through a few important factors which don’t affect share price directly, but affect the demand side of the formula.
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How Share Price is Determined? Factors to Influence
Here are some important factors which can create a surge or an upward trend for higher demand shares, if:
- The company has scalable market shares and is making huge profits.
- Its shareholders are happy, that simply means they get dividends issued and payments.
- The company has a great future due to their prospective future plans.
Moreover, Company shares form the basis of any company’s value. Thus, pricing is a highly delicate matter. These simple details about share price determination above is a humble attempt to help you understand the price trending philosophy.
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What is share price? How share price is determined? The answers to these rest in the market fluctuations altogether. To conclude, in the simplest terms and frankly speaking, share price is just a battle play between “supply” and “demand”. What would you say about it? Any other crucial points you wish to add here, feel free to do so.