How is the stock price of a company decided?

People are so confused with stock prices and the stock market. Every company has its own value and it is reflected in its stock price. There is a real business behind these complex products and these stock prices. First of all, it is important to know about face value and the trading price.

stock price

Face value

When there is no change in the price of business and it remains the same. For example, a company has 1000 shares @ Rs 5 a share. If the company increases the face value of its share to Rs 10 then the no. of shares reduces to 500 only. In the above procedure, the price of business remains the same. Face value can only be changed by the company. Whenever a company changes its face value, it has the same effect on trading price because of the circulation changes.

Trading price

If a company is listed on an exchange then its share price is determined by the supply and demand of the share. If more people are buying the share then the price goes up until it finds equilibrium. If more people are selling the share, the price of share falls. The trading price of any share is directly proportional to the profit and maturity of the company.

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What happens to the listed shares?

An investor pays for the share that are the future returns a company makes. Company’s future plans and current business is subjective to its future returns. While the overall industry and economic situation play the main role in determining the share price.

How much return will you get?

Almost complete market research is based on how much money a business will make in the future.

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Two main methods for price estimation:

  1. Price-earnings method– It is the ratio between the current market price and trailing 12 months EPS (Earnings Per Share). This ratio shows how much will market pay today.
  2. Cash flow method- It is a popular method for companies that do not depend on much debt.

Calculation of present value

Present value= FCF/ (1+R) n

R= Discount rate

A discount rate is defined as the lowest rate of return from the investment. The rate which bank fixed deposit demands.

N= Number of years

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In a determination of stock price, 2 factors play an important role.

  1. Forecasting of future returns

Future is uncertain and many opinions and predictions can be true. This creates different growth track for the company and people pays a different price for the same stock. This changes the company’s stock constantly.

  1. Manipulation

A business is not run by morally pure or most ethically people. There are corrupt promoters, news breakers, insiders, operators and so on. Many sellers and buyers take the price of a share to a new level where it makes no sense.

Conclusion

Many factors are responsible for a stock’s price. Stock price depends on the company’s business, how it is going and other factors. The demand and supply of the stock are also responsible for the stock’s price, how often investors are buying or selling the stocks etc. Here we have discussed many facts that are responsible for the stock’s price.

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