What is Stock Price?
The term stock price refers to the current price that a share of stock is trading for on the market.
Every publicly traded company, when its shares are issued, are given a price – an assignment of their value that ideally reflects the value of the company itself. The price of a stock will go up and down in relation to a number of different factors, including changes within the economy as a whole, changes within industries, political events, war, and environmental changes.
Stock Price Changes for a Company
Aside from the other things that make any stock price change, there can be issues within a company that cause its stock price to move in either direction.
1. Law of supply and demand
If a company produces a good that not many others produce or a good that is highly desired or necessary, the price of its stock will climb because the demand is high. When the supply of the good balances out with the demand, stock prices will tend to plateau. If the supply is greater than the demand, the company’s share price will likely drop.
It also depends on how effectively and uniquely the company produces the good. If they create a variation on an old standard, their share price may stay the same or increase even if supply is high.
In the end, it’s really about the law of supply and demand.
2. Management or production changes
Changes in management or production can also cause a company’s share price to rise or fall. It depends on how effectively and efficiently the company is managed and goods are produced. Changes to the management team, style, or how goods are produced can boost efficiency and thus overall effectiveness – increasing profits and causing the share price to rise. However, negative changes can result in the exact opposite effect.
3. Mention of the company’s name
One other point of note that can significantly affect the stock price is the mention of the company’s name in the news, on social media, or by word of mouth. It is specifically in regard to one of two events: a scandal or a success.
Scandals – true or untrue – can cause a company’s share price to drop, simply by being associated with anything negative. Also, being connected to, or responsible for, a breakthrough – either in the market or respective industry – will usually cause a stock’s price to increase.
Stock Price, Earnings, and Shareholders
Stock prices are first determined by a company’s initial public offering (IPO) when it first puts its shares into the market. Investment firms use a variety of metrics, along with the total number of shares being offered, to determine what the stock’s price should be. Afterward, the several reasons mentioned above will cause the share price to rise and fall, driven largely by the earnings that can be expected from the company.
Traders use financial metrics constantly to determine the value of the company, including its history of earnings, changes in the market, and the profit that it can reasonably be expected to bring in. It will cause traders to bid share prices up and down.
Traders aim to make a return on their investments. It is done in two primary ways:
- Dividends – If the company’s stock pays dividends, regular payments are made to shareholders for every share held
- Purchasing shares when they are at a low price and selling them back once the price goes up
A stock price is a given for every share issued by a publicly traded company. The price is a reflection of the company’s value – what the public is willing to pay for a piece of the company. It can and will rise and fall, based on a variety of factors in the global landscape and within the company itself.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: