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How are stock market price quotes determined?

A:

Quick Answer

The forces of supply and demand dictate stock prices, according to Investopedia. Buyers wanting to buy a stock create demand, and sellers provide supply. When demand rises in relation to supply, prices of stocks rise, and when demand falls in comparison, prices fall.

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Full Answer

A significant factor that influences demand or lack of it for a stock is whether information about the stock is positive or negative regarding a company's worth, explains Investopedia. Market capitalization, or a company's value, reflects both a company's earnings and its prospect of future earnings. Buyers and analysts base their value projections of companies on earnings predictions for the future. A company's present earnings are not the only indicator of market capitalization. Many companies' market values rise astronomically without showing much earnings because of investors' attitudes and expectations about them. This occurred with many technology companies during the dotcom bubble.

Something known as "herd instinct" tends to affect the direction and momentum of a stock's price as well, reports Investopedia. When news or buying activity pushes a stock in one direction, the mentality of the larger trading environment often follows suit. Thus, upward price action can escalate with herd buying, and downward price action can escalate with herd selling. Political events, analyst ratings and reports, economic news, and other external environment activities all contribute to changes in perceived value of a stock and its market price.

Additionally, the price of a stock on its own does not represent the value of one company in comparison to others, advises Investopedia. A calculation of the value of a company must use both the price of its stock and the amount of shares outstanding or on the market. Comparing two companies only by the price of a stock share is an incomplete evaluation.

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