Delving into the stock market: What determines a share price?

Julie Brownlee, Fsp Invest, 05 Mar. 2015

Tags: shares, share price, what determine a share price, stock market, stocks, share,

Investing in the stock market is all about buying shares with the hope of selling them at some time in the future for a higher price and banking the difference.

So what actually determines the price of a share?

Let’s take a closer look…

What is a stock market?

The best way to think of a stock market is a place where buyers and sellers meet. Some come to the market to buy shares, other comes to sell shares.

Both buyers and sellers want a bargain, and to make money from their transaction.

How shares fits into the stock market

Let’s take a look at an example…

Say there’s a company called Company ABC. What determines the worth of these shares?

Well a share in a company is just that, if you own a share, you own a piece of that company.

So if Company ABC only has 100 shares and you own two of them, you own 2% of the company.

If you wanted to, you could sell your 2% share in Company ABC. So who will buy them? It all comes down to how much you want to sell them for.

For instance, if you offered them for free, you would get numerous takers. But if you tried to sell them for R1 million each, chances are you wouldn’t sell them.

The shares you own are only worth what someone will pay for them.

That’s where the stock market comes in. The stock market determines a realistic price for shares. And you need buyers and sellers to haggle to find this price.

Why a share price rises

If Company ABC releases some very positive news about a future venture that is going to make the company lots of money, chances are the number of buyers of the share will rise.

In response to this, the share price of Company ABC will rise.

But say the deal falls through, many shareholders may want to sell their shares in Company ABC. The share price will fall as a result.

Of course, there are a multitude of reasons behind a share price rising and falling, but it boils down to the demand for a particular share. And the mood of the market can have a big impact on share prices too.

So there you have it, what determines a share price.

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