Stock prices tell us the amount someone is willing to pay for a company’s shares at a particular time.
Market analysts use a business’s past and present performance to predict future outcomes and determine a share’s cash worth. The price of a stock typically fluctuates since a wide range of factors contribute to the cost. Fundamental factors determine the long-term price trends for stocks, while technical elements have an impact on short-term price changes.
Stock price basics
A stock’s price and a stock’s value are two different things. The value of a stock is based on a business’s past and present earnings, market share, sales volume over time, and other similar factors.
The price tells us how much a buyer is willing to pay and for how low a company is willing to sell its stocks. Somewhere in the middle lies the actual price. A stock’s price and value are usually within the same ballpark. However, sometimes stock prices can be much higher or lower than their value.
Stocks have two prices, which are:
- The bid: The price buyers are willing to pay for a share.
- The ask: The price for which companies are willing to sell stock.
When demand is higher than supply, stock prices go up. When supply is higher than demand, stock prices decrease.
To understand the value of a stock, the following must be examined:
- Quoted market value: This is the value of the stock after the buyer and seller negotiate a price.
- Real or intrinsic value: The net present value of a company’s income. This number is based on the productive capacity of a company and the amount of cash that could potentially be produced infinitely.
Companies often sell stocks for more or less than their intrinsic value. Some factors and circumstances can drive the price of shares up or down. Check out Benzinga’s How to Start Investing in Stocks for more information about getting started.
Bid and ask
How stock prices are determined
A variety of influences determine stock prices that include both internal and external factors. Unfortunately, there’s no formula to predict stock price behavior since any number of factors can impact prices at any time. Below are the main factors that drive stock prices and future predictions.
In an optimal stock market, stock prices would be based primarily on fundamental factors. These refer to two key components:
- Earnings per share (EPS), or earnings base: Companies allocate a portion of their profits to outstanding shares of common stock.
- A P/E ratio, or valuation multiple. This ratio is the stock’s current price, relative to the company’s earnings per share.
Stock analysts use these values to predict the future tendencies for stock prices. Additional factors, such as perceived risk of the stock, discount rate, and expected growth also come into play when setting future expectations.
Technical factors refer to all the external factors that can cause stock prices to increase and decrease. These can include any number of possible circumstances, including:
- Trends: Sometimes stock prices change according to short-term trends. Stocks can gain momentum, either gaining popularity or losing value quickly.
- Economic strength: Company stocks often mirror the current state of the economy. In times of prosperity, stock prices see favorable increases; during recessions, stock prices can go down, affecting companies in similar industry segments.
- Inflation: During times of inflation, stock prices see favorable increases in companies’ pricing power. On the other hand, periods of deflation cause stock prices to drop and businesses to lose value.
- Liquidity: This term describes how much attention a stock receives from investors. Large corporations tend to be well-known and receive more attention. Small businesses, on the other hand, have more difficulty gaining publicity, even if they have strong investment portfolios.
These are just a few technical factors that can cause stock prices to rise or fall. There are an infinite number of factors that can cause stock prices to change unpredictably, and another includes market sentiment or the effects of sociological and psychological factors that contribute to fluctuations in stock prices. Since market sentiment is a subjective area, it makes it difficult to predict its impact on the market.
All these factors and more help set stocks prices and predict future outcomes.
Stock prices move due to many factors
Facts about stock prices
There are many ways in which stock prices can be changed and adjusted. For example, some companies use stock splits to adapt their prices favorably. Stock splits are done by replacing some shares at one rate for another number of shares at a different cost.
The minimum rate of one share of stock is $1. However, average prices range from $25 to $75. Most American companies use something called “round lot” trading. This type of trading refers to buying shares in multiples of 100.
By analyzing technical and analytical factors, we can form a rough prediction of short-term and long-term stock price tendencies. Fundamental factors tend to affect long-term stock prices. Technical factors cause short-term stock price fluctuations. At the same time, market sentiment introduces a limitless number of sociological factors to take into consideration.
Stock prices can be different from the actual value of the stock. The stock price refers to an agreed-upon sum, which the buyer and seller negotiate. The bid price is how much buyers are willing to pay for shares. The asking price is for how much money companies are willing to sell a stock.
To understand stock prices, we have to consider the various factors that contribute to fluctuations in their value. Fundamental factors, such as the earnings base, play a pivotal role. Technical factors, such as inflation, liquidity, and economic strength impact short-term changes. Market sentiment, along with sociological changes, can cause prices to go up or down. An online stock broker can help you navigate these challenges.
To choose the best online stock broker, check out Benzinga’s Best Online Stock Broker for Beginners.