Stock Price
Stock price is the current price of a company's stock at which it trades in the market.
What is Stock Price?
A stock price is the current price of a company's stock at which it trades in the market. People often judge a company's worth by looking at its stock price. However, this cannot be true all the time.
A company's stock price could be either undervalued or overvalued. Hence, its true value can be found thereon, and decisions could be taken accordingly.
Those who are completely new to this term must think about which companies have their shares publicly traded. The companies finance their business needs in two ways: it is either with the help of debt or through equity.
Those who acquire funds through debt must pay interest to the banks or institutional lenders. As for those with equity, the company unplugs a part of its shares of the business to be bought by the public in a regulated market through stock exchanges.
According to law, a company is allowed to issue only limited shares to the public, called authorized shares, out of which the issued shares are called outstanding shares, which can be traded on the stock exchanges.
Returning to the main topic, the price of stock keeps on changing from time to time, no matter how small or large the magnitude of the change is.
It happens due to different market factors, industry-related changes, macroeconomic circumstances, political events, environmental changes, etc.
Let us look into how the price changes at the macro and micro levels of the company.
- A company's stock price is influenced by various factors, including demand and supply dynamics, management performance, and market sentiment, which can lead to fluctuations in its value.
- While stock price reflects the current market price of a stock, stock value represents its intrinsic worth, determined through comprehensive financial analysis. Investors should consider both factors to make informed investment decisions.
- Factors such as bid and ask prices, P/E ratio, and market demand influence stock prices, with fluctuations driven by changing market conditions and investor behavior.
- The Efficient Market Hypothesis suggests that stock prices reflect all available information, while the concept of intrinsic value involves calculating a stock's true worth based on cash flows and discount rates, providing different perspectives on stock valuation.
Stock Price Changes for a Company
There are many reasons as to why a company's stock price could change. We have listed a few important and more prominent reasons which lead to changes in the price. Let us elucidate them one by one.
1. Law of Demand and Supply
The companies or even the exchanges cannot regulate the price of the stock directly, and the prices are affected by the law of supply and demand of the stock in the market.
If there is a high demand for the goods produced by the company and it is performing great over the years, the demand for the stock will rise, and hence the price of the stock will increase with the rise in demand. This is usually how it goes.
Company earnings reports and news regarding mergers, acquisitions, or regulatory changes often serve as catalysts for significant price movements in stocks. These events provide vital insights into a company's financial health, growth prospects, and strategic direction, prompting investors to reassess their valuation of the stock.
However, suppose the company loses a lot of money due to incurring consecutive losses or maybe failing a new project involving expansion plans. In that case, the demand for the stock will fall drastically. Thus, the supply here will be much higher than the demand would be, leading the stock price to plummet.
Not only will the law of supply and demand affect the price, but also any news sensitive to the company's image.
2. Company's Management Team
Many investors and analysts carefully scrutinize the company's annual report and also gain some knowledge about the current management of the company.
Many small or individual investors overlook the importance of a company's management team. It consists of people who perform at the company's top level and have a say in its main decisions.
Thus, a prudent investor must look into any probable changes in the company's management team to get an idea of the central ideology of an entity that they strive to achieve.
3. Media and News
A company's stock price is at times sensitive to its mention on various social media platforms. It doesn't matter what the news is, but it impacts the investors on a psychological level, and thus, it leads them to make decisions as the situation unfolds.
Thus, a company should hold its goodwill dearly to maintain a respectable image in the market.
Stock prices are impacted by the actions of institutional investors, including hedge funds, mutual funds, and pension funds, which can influence market sentiment.
These are some of the broad reasons that may lead to changes in share prices. Now let us delve deeper into the two closely related terms: stock price and a company's stock value.
Stock Price vs. Stock Value of a Company
| Comparison Terms | Stock Price | Stock Value of a Company |
|---|---|---|
| Definition | Refers to the current market price at which shares of a company are bought and sold. | Represents the intrinsic worth of a company's shares, based on its fundamental financial metrics and future earning potential. |
| Determinants | It is influenced by supply and demand dynamics, investor sentiment, market speculation, and short-term fluctuations. | It is determined by factors such as revenue growth, earnings per share (EPS), profit margins, market share, management efficiency, and industry outlook. |
| Time Horizon | Highly volatile in the short term, subject to daily, hourly, or even minute-by-minute fluctuations. | Reflects a more stable, long-term perspective of the company's performance and growth potential. |
| Market Perception | Can be affected by market sentiment, news events, analyst reports, and overall market trends, sometimes deviating from underlying fundamentals. | Tends to align more closely with a company's actual financial health and prospects, although market perception may still influence it to some extent. |
| Investment Strategy | May encourage short-term trading strategies, such as day trading or momentum trading. | Typically aligns with long-term investment strategies, focusing on fundamental analysis and holding investments for extended periods. |
Determined Stock Price
As we have talked about earlier, a share price is determined by the forces of demand and supply in the market. Therefore, if the demand for the stock is high, its price will increase and vice versa.
The share price depends on the bid and ask for a particular stock.
A stock exchange determines the share's price by running various algorithms to see which price is the most prominent in the case of ask and bid. This way, the stock exchange decides on the current market price of the stock.
Note
What is bid and ask? A bid is an offer at which a buyer offers to buy a certain number of shares at a specific price. Ask is an offer at which a seller offers to sell a certain number of shares at a specific price.
The stock price could be a flat line or very volatile, depending on various market factors that may affect the price demanded and offered of the stock.
One of the other ways to determine share value could be through the P/E ratio or the price-to-earnings ratio. Take the stock's price and divide it by its earnings from the past 12 months.
The stock's intrinsic value will be the P/E ratio multiplied by its earnings per share (EPS).
Generally, companies that have been in the industry for a long time have a higher and more stable P/E ratio, and comparatively, new companies have a lower P/E ratio.
During an IPO, the company issues its shares for the first time to the public in the primary market, from where the price of the stock is determined based on the stock performance and the company value, which could be based on its net present value (NPV).
From thereon, the price keeps fluctuating as per the demand and supply of the stock.
Note
IPO or initial public offering is an offer wherein a private company opens its shares to be traded publicly on a stock exchange for the first time. For this process to complete, companies are obligated to comply with some rules set by the regulating body of stock exchanges in the country (SEC in the US and SEBI in India).
stock price Theories
Many theories rule the functioning of a stock market and the price movements of the stock. We will look into the two most common and widely studied theories.
The first one is the efficient market hypothesis, and the second is the intrinsic value of a stock. These two theories are so vast that several research papers and studies are dedicated to them. However, we will discuss them here in a brief manner.
Let us look into them briefly, one at a time.
1. Efficient market hypothesis
The efficient market hypothesis is an investment theory that states that the share prices reflect all the available information in the market. That means the price is vulnerable to the information known.
Some of the assumptions considered in an efficient market are as follows:
- The stocks of the companies are stranded on exchanges at fair market values.
- The stock values represent all the information that had been prevailing in the market.
- Since every player in the market has access to all the information, no one can outperform the market.
This is because everyone has the same information available, and none has the edge over the other.
2. Intrinsic value
The intrinsic value of a share is the calculated value of the company, and this value is then divided by the outstanding shares. This value can vary from the market value of the stock.
Unlike market price, which fluctuates based on supply and demand dynamics, intrinsic value focuses on the underlying fundamentals of the business. It uses cash flows and a discount rate to analyze the company's value.
Government policies, trade agreements, and geopolitical tensions are critical factors that can introduce significant uncertainty into financial markets, influencing stock prices and investor sentiment.
This method is called discounted cash flow or DCF method. DCF analysis involves projecting a company's future cash flows and discounting them back to their present value using a discount rate.
By discounting future cash flows, DCF analysis accounts for the time value of money, reflecting the idea that a dollar received in the future is worth less than a dollar received today..
Conclusion
Understanding stock prices entails grasping the interplay of market forces, investor sentiment, and company performance. While stock prices serve as immediate indicators of market valuation, investors must delve deeper into a company's intrinsic value to make informed decisions.
The determination of stock prices involves complex algorithms and market dynamics, including bid and ask prices and the influence of supply and demand.
While stock prices may fluctuate in the short term due to various factors, long-term value is derived from fundamental analysis and consideration of a company's growth prospects and financial health.
Whether viewed through the lens of market efficiency or intrinsic worth, the study of stock prices illuminates the intricate workings of financial markets and the complexities of investment decision-making.
Stock Price FAQs
Stock prices of any company could be easily monitored from the web page of the stock exchange it is listed on. So, for example, if we want to check the current price of the share of Wipro Ltd., we can check it on the NSE website along with other information.
Stock prices can be estimated in many ways. One of the most common methods is the DCF method. Herein, we consider a hurdle rate at which we discount the company's cash flows and then summate them to get the net present value (NPV).
We can later divide it by the number of outstanding shares of the company to get to our valuation of the stock and compare it with the prevailing market price.
IPO or initial public offering is the process where a private company goes public for the first time. It issues new shares into the market to be open for public trading.
IPO is also underwritten by at least one or more investment banks to assist the entity in issuing more shares on more than one stock exchange.
As for the FPO or the follow-on public offer, it is a process to issue new shares in the market by a company that is already listed on exchanges. So it issues new shares to the investors or the company's existing stakeholders.
No. Stock prices must not be the only factor one should monitor while buying stocks and investing in companies.
There are other factors as well that are not necessarily quantitative in their existence but are as important, or maybe more important, as the ones that a figure can represent.
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