What is the stock market driven by?
Generally speaking, the stock market is driven by supply and demand, much like any market. When a stock is sold, a buyer and seller exchange money for share ownership. The price for which the stock is purchased becomes the new market price. When a second share is sold, this price becomes the newest market price, etc.
Who decides the price of a stock?
But in normal circumstances, there is no official arbiter of stock prices, no person or institution that “decides” a price. The market price of a stock is simply the price at which a willing buyer and seller agree to trade. Why then do prices fluctuate so much?
What is the market price of a stock?
The market price of a stock is simply the price at which a willing buyer and seller agree to trade. Why then do prices fluctuate so much? The vast bulk of stock trades are made by professional traders who buy and sell shares all day long, hoping to profit from small changes in share prices.
How are stock prices determined in the secondary market?
How Stock Prices Are Determined After shares of a company's stock are issued in the primary market, they will be sold—and continue to be bought and sold—in the secondary market. Stock price fluctuations happen in the secondary market as stock market participants make decisions to buy or sell.
How is a company's share price determined?
After a company goes public, and its shares start trading on a stock exchange, its share price is determined by supply and demand for its shares in the market. If there is a high demand for its shares due to favorable factors, the price will increase.
What happens when a stock is sold?
When a stock is sold, a buyer and seller exchange money for share ownership. The price for which the stock is purchased becomes the new market price. When a second share is sold, this price becomes the newest market price, etc.
How to calculate market cap?
Market cap is calculated by taking the current share price and multiplying it by the number of shares outstanding. For example, a company with 50 million shares and a stock price of $100 per share would have a market cap of $5 billion.
How is the market cap determined?
A company's market cap can be determined by multiplying the company's stock price by the number of shares outstanding. The stock price is a relative and proportional value of a company's worth.
Why is market capitalization inadequate?
Market capitalization is an inadequate way to value a company because the basis of it market price does not necessarily reflect how much a piece of the business is worth.
What is a DDM in stock market?
There are specific quantitative techniques and formulas that can be used to predict the price of a company's shares. Called dividend discount models (DDMs), they are based on the concept that a stock's current price equals the sum total of all its future dividend payments (when discounted back to their present value).
What is market cap?
While market cap is often used synonymously with a company's market value, it is important to keep in mind that market cap refers only to the market value of a company's equity , not its market value overall (which can include the value of its debt or assets).
How are stock prices determined?
In order to understand how stock prices are determined, it's important to first know how the capital markets work. Within the capital markets, buyers and sellers collectively help determine the stock price. There are many factors and theories on why stock prices fluctuate, but two theories are the most cited. The Efficient Market Hypothesis says that a stock price reflects a company's true value at any given time. The Intrinsic Value Theory states that companies may trade for more or less than they are worth.
Why do stock prices fluctuate?
The Efficient Market Hypothesis says that a stock price reflects a company's true value at any given time. The Intrinsic Value Theory states that companies may trade for more or less than they are worth.
How does a market maker in the middle work?
A market maker in the middle works to create liquidity by facilitating trades between the two parties. Put simply, the ask and the bid determine stock price. When a buyer and seller come together, a trade is executed, and the price at which the trade occurred becomes the quoted market value.
Why do capital markets facilitate a secondary market?
Secondly, capital markets facilitate a secondary market for existing owners of stocks and bonds to find others who are willing to buy their securities. The secondary market is complementary to the primary market through the liquidity it provides.
What happens to a stock when its value rises?
As the company's value rises, the stock's price does, too, though there are other factors to consider.
What is a company that issues bonds?
A company that issues bonds is essentially establishing a loan deal with an investor, and the company agrees to pay back the loan plus interest over a set timeline. A company that issues stock is selling partial ownership in the company.
What is capital market?
Capital markets create the opportunity for institutions and individuals to invest on someone's behalf —for a fee. This investing is sometimes done through a broker-dealer.
Understanding capital markets
To understand how share price is determined, it’s helpful to step back and consider what it means to buy a stock.
What determines stock price?
To put it simply, the price of a stock is determined by supply and demand. If more people want the stock than the number of shares available, the price goes up. Conversely, when lots of people are looking to sell their shares, the price of the stock falls. If an investor sells when the stock is higher than the price they paid, they make a profit.
What factors can affect stock price?
News and events happening at the company specifically, as well as the country or the market at large, can affect stock prices.
The bottom line
At the most basic level, the factor that determines stocks’ prices is supply and demand. Buyers and sellers trading via the market set the price. However, there are complex considerations of both the company’s performance and broader market forces that can affect that supply and demand.
What drives stock prices?
Stock prices are driven by a variety of factors, but ultimately the price at any given moment is due to the supply and demand at that point in time in the market. Fundamental factors drive stock prices based on a company's earnings and profitability from producing and selling goods and services. Technical factors relate to a stock's price history ...
Where are stock prices determined?
Stock prices are determined in the marketplace, where seller supply meets buyer demand. But have you ever wondered about what drives the stock market—that is, what factors affect a stock's price? Unfortunately, there is no clean equation that tells us exactly how a stock price will behave.
Why is low inflation bad for stocks?
2 Deflation, on the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies.
Why do you buy stock with a valuation multiple?
That's the reason for the valuation multiple: It is the price you are willing to pay for the future stream of earnings. 1:26.
Why do stocks move up?
Often a stock simply moves according to a short-term trend. On the one hand, a stock that is moving up can gather momentum, as "success breeds success" and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called reverting to the mean. Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are "trendy" does not help us predict the future.
Do company stocks track with the market?
Company stocks tend to track with the market and with their sector or industry peers. Some prominent investment firms argue that the combination of overall market and sector movements—as opposed to a company's individual performance—determines a majority of a stock's movement.
Is EPS a measure of earnings power?
Although we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power. Many argue that cash-flow-based measures are superior. 1 For example, free cash flow per share is used as an alternative measure of earnings power.
Which organization took over the oil market?
The Organization of the Petroleum Exporting Countries (OPEC) then took over, ruling the oil markets and oil prices in the years that followed. However, with the discovery of shale oil in the U.S. and advances in drilling techniques, the U.S. has since re-emerged as a top energy producer.
What events have helped OPEC maintain control over oil prices?
12 . A number of world events have helped OPEC maintain control over oil prices. The fall of the Soviet Union in 1991 and the resulting economic tumult disrupted Russia's production for several years.
How does OPEC+ affect oil prices?
Thus, when there is a glut of oil in the world, OPEC+ cuts back on its production quotas. When there is less oil, it increases oil prices to maintain stable levels of production.
Why do oil companies pump out more oil?
As oil prices rise, U.S. oil companies pump out more oil to capture higher profits, limiting OPEC's ability to influence its price. Historically, OPEC's production cuts had devastating effects on global economies, although this is no longer always the case.
What happened in 1973?
The 1973 oil shock swung the pendulum in OPEC's favor. That year, in response to America's support for Israel during the Yom Kippur War, OPEC and Iran stopped oil supplies to the United States. This move had far-reaching effects on oil prices. 11 . OPEC controls oil prices through its pricing-over-volume strategy.
What was the impact of the discovery of the Spindletop refinery in Texas?
In 1901, the discovery of the Spindletop refinery in eastern Texas opened the floodgates of oil in the U.S. economy, leading to the rapid development of the U.S. oil industry. 5 Increased supply and the introduction of specialized pipelines helped further reduce the price of oil.
Why was oil price so high in the early years?
Prices were volatile and high during the early years because the extraction and refining process lacked the economies of scale that are present today.
How are gas prices ruled?
Gas prices, like most other commodities, are ruled by the forces of supply and demand. Holding demand constant, when supply rises prices fall and. Holding supply constant, when demand goes up, so do prices.
How is gasoline price determined?
Logically enough, the price of gasoline is determined in part by the price of oil. But a whole host of other factors impact the average retail price of gas. According to the U.S. Energy Information Administration, the price of crude oil actually comprised only 54% of the average retail cost of gasoline in 2019.
How does supply and demand affect gasoline prices?
The law of supply and demand regulates gasoline prices, as it does nearly all commodities. Both supply and demand are changing all the time, as new oil wells are discovered and as economic conditions impact consumer demand. As a longer-term general trend, the supply of high-quality oil is fixed and dwindling while global demand is increasing ...
Why is oil so expensive?
This type of oil is in high demand because it contains fewer impurities and takes less time for refineries to process into gasoline. As oil gets thicker, or "heavier," it contains more impurities and requires more processing to refine into gasoline.
Does the price of gasoline balance the supply and demand?
The price will balance the supply of gasoline with the demand for it . The global nature of the market for gasoline assures that balance. That leaves inflation and taxes to account for the biggest relative increases in the price of gasoline.