A stock price simply refers to the cost paid by investors to buy one share in a company. This amount is not fixed as the share market is prone to many fluctuations caused by various factors. If the company is performing well then its stock price increases and dips when the company is facing challenges.
The price of a stock is set by supply and demand in a secondary market. Determining the stock price is not a hassle and once you know the share market basics for beginners, you’ll be able to calculate it for yourself. Either way, as a quick solution, in this blog, we’re going to know about the ways to calculate stock prices and the factors that affect them. So, let’s get into it.
What Affects a Stock Price?
Demand and supply are two of the major forces that determine stock prices. While demand refers to the amount of shares that people want to purchase while supply is the amount of shares that people want to sell. It is common sense to know that the prices will rise considerably when the demand is higher at all times. Meanwhile, there also occurs an equilibrium state where demand and supply are balanced. This is the state where stock prices are determined.
Apart from the general state of the economy and market, there are multiple industries and company-specific factors that contribute to the same. These include:
- Company’s Activity and Attractiveness
- Industrial Growth and Innovation
- Market penetration
- Business Model
- Competitive Advantage
- Quality of Management
- Industrial Structure
- Major Investors
- Monopoly Power
Furthermore, inflation, political scenarios, world events, interest rates, and consumer spending also play an important role in determining the ever-changing stock prices in the share market.
How to Calculate Stock Price?
Calculating the intrinsic stock price is essential for making informed investment decisions.
The formula to calculate the stock price is:
The total market capitalization of a company’s stock / Total outstanding shares.
There are several methods for determining the intrinsic worth of a stock. These include:
- Discounted Cash Flow (DCF) Analysis Model
This method commonly uses Free Cash Flow (FCF) and Free Cash Flow to Equity (FCFE) to project the future cash flows of a company and discount them back to their present value.
- Price/Earnings (P/E) Ratio
The method determines stock price by comparing the current shape price of the company to its per-share earnings.
- Price/Book (P/B) Ratio
This method compares the market value and the book value of the company.
- Price/Sales (P/S) Ratio
This method compares the stock price of the company to its revenues.
Wrapping up
Stock prices mostly depend on the supply and demand chain, something which is prone to frequent fluctuations. Naturally, if the demand is higher than the stock prices increase and when the supply is higher, the stock prices tend to go down. There are multiple ways to calculate stock prices at a particular equilibrium state which we discussed earlier. If you want to learn more about the basics of the share market then you can opt for the stock market courses provided by Upsurge.club and sharpen your trading skills.
