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How are Stock Prices Determined | Factors Affecting it

  • Marisha Bhatt
  • Jan 14 2022
  • 6 minutes
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Stock markets are highly volatile as a matter of fact. This volatility essentially means the changes or the fluctuations in the prices of shares due to various factors. Quite often most of these factors are beyond the control of the participants of the share market and this gives rise to speculations and placing carefully analyzed bets that may or may not turn profitable. The key to having a profitable portfolio is the ability to track the share prices with a good amount of efficiency. Hence, this requires a better understanding of the factors that influence the share prices. 

Given below is a brief discussion relating to the factors that influence the share prices and how it is determined. 

What are stock prices?

Stock prices are the prices at which the shares of any company are traded at the recognized stock exchanges. The initial share of any company is dedicated at the time of their Initial Public Offer (IPO). After the initial price is set, the share prices are affected by various market forces and other relevant factors. These factors collectively help in determining the prices of the shares of a company at any given point in time. 

How to calculate stock price?

As discussed above, the share price of a company is first determined at the time of its IPO. At such time, the prices of the shares are determined based on the performance of the company, its financials, and the valuation of the company. After the launch of the IPO, the share price is determined mainly based on the basic demand-supply forces of the market. 

Which factors affect stock prices?

There are several factors that affect the stock prices of any company. Some of the key factors are discussed below.

a. Supply and demand factors

The demand and supply of any stock are one of the prime factors that affect stock prices. If the supply of a stock is less and the demand for it is more, then it will push the share prices to go up and vice versa. The demand for any stock is usually pushed high based on its better or improved financial data or any favourable news regarding the company or the sector that it belongs to.

The market trends and the current sentiment are other factors that drive the share prices. It is usually based on the collective psyche of the investors or the company’s financials that move the prices of the stock in a particular direction. 

c. Position of the company in the industry or market

The relative position of the company in the industry or the sector is also translated into its share prices. A pioneer in the industry will be preferred more in comparison to lower-performing stocks or newer stocks. This increased demand will push the stock prices of such industry stalwarts higher in comparison to others. 

d. Competition of the company

It is generally observed that a company having a monopoly in the industry or sector can command higher stock prices in comparison to sectors where the competition is higher. Therefore, in sectors like FMCG where the competition is higher, the share prices are more volatile as compared to paints where the competition is relatively lower.

e. Fundamentals of the company

Before investing in any stock, it is prudent for every investor and trader to have a thorough fundamental analysis of the company. This will help in determining if the share is undervalued or overvalued. The outcome of this analysis is crucial in determining the base prices of the stock as well as the demand for the same. 

f. Primary and secondary markets forces

Most stocks are traded on the primary markets as well as the secondary markets. The primary markets are where the usual trading of the stocks takes place along with an IPO. Secondary markets on the other hand are also known as derivative markets (Futures and options, forwards contacts, swaps). Secondary markets are highly liquid and volatile as the prices of the asset or the security are based on the price movements of the stock in the primary market. Also, investors and traders react more rapidly on the secondary markets based on the slightest stimuli and hence, the price volatility is higher.

g. Economic and political factors

The overall economy and the political factors (policies and government decisions or legislation) have a huge impact on the share markets. The general uptrend or downtrend of the market is directly influenced by any positive or negative news of the economy or the unstable political scenario of a country. 

During the start of the pandemic, we saw the markets tumble at a faster rate but they bounced back soon too, faster than the recovery of the economy. Hence, while economic and political factors have a major influence, they cannot be seen on a standalone basis.

h. Management credibility

Strong and quality management of the company can help it tide over any volatile situation whereas, if the management is not capable, it will soon take down even a profitable business. Hence, the ability of the management is often viewed as of great importance by seasoned as well as novice investors and traders.  

i. Liquidity

The liquidity of the company is also a contributing factor in determining the stock prices. This is in line with the principle of demand and supply. If there are no takes for any stock, the prices will fall dramatically even if the availability of the stock is high. On the other hand, if the demand for the stock is high and the supply is not enough or more or less constant, the stock prices will rise or move in a fixed band.

Conclusion

The calculation of stock prices is one of the starting points while listing a share at the recognized stock exchange as well as for any investor or trader to build their portfolio. Therefore, it is important to understand the basic factors that can influence the prices of any stock to help its movements and price trends. 

FAQs

What are some other factors that can influence stock prices?

 Some other factors that can influence the stock prices are,
-Natural disasters
-Dividend announcements
Inflation
-Interest rates
-Global events

What happens to share prices when a company declares dividends?

When a company declares dividends, the share prices tend to go up.

How can a private company calculate its share prices?

A private company can calculate its share prices using methods like assets approach, income approach, market approach, or using its discounted cash flows.

When are stock prices monitored more closely?

The share prices are monitored more closely by traders (mainly for intraday trading) or short-term investors focusing on making short-term gains.

How can an investor get a return on their investment in stock markets?

 An investor can get returns on their investment through dividends or through capital gains on their investment.

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