A share price or stock price is the price of purchasing one share in a company. The share price fluctuates according to the market conditions and is calculated by a stock exchange in real-time. Before understanding how to calculate share price, you should know that it increases with high demand and decreases with low demand.
Published on 16 January 2023
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Are you wondering how is stock price determined? Exchanges calculate a stock’s price by determining the price at which the highest number of shares have been traded. The share price often changes due to differences in the purchase or sell offer of the shares.
Keep scrolling to understand how to calculate the share price.
Calculating the Market Price of a Share
If you wish to understand how to calculate stock price and determine its market cap, you should figure out the estimated market price of the share. The last updated value of a company share multiplied by its outstanding shares will help you figure out the value of a particular share for traders.
You will also come across another calculation method in this “how to calculate share price” guide. It is by calculating the price-to-earnings ratio of a share. In this case, you will have to divide the price by its earnings in the past 12 months. So, how to calculate share value using the P/E ratio?
Stock value= P/E ratio * Earning per share
While growing companies usually exhibit a high P/E ratio, established companies have slow P/E growth rates.
Factors Affecting Share Price
Now that you know how to calculate share price, you should learn about the factors affecting it. Factors affecting share price can be direct as well. Some direct factors affecting share prices are as follows:
● Supply and Demand
Supply and demand are crucial factors that influence the price of a share. When more shares are bought than sold, the price increases. When supply and demand are equal, the share prices usually remain steady with only little increases and decreases. An initial increase is spotted when either supply or demand outweighs another.
● Revenue and Profits
The revenue and profits generated by a company from selling products and services have a huge impact on its stock price.
● Behaviour of Traders and Investors
The price of stocks is also affected by the actions of investors and traders in the market.
● IPO Affect
The amount of new shares available in the market for purchase is restricted only when a company issues them. The price usually increases when a large number of people want to purchase these shares, but the supply is limited.
At times, corporations decide to buy back their stock from the market. In that case, the circulation of shares in the market gets minimized. Prices often rise due to the limited supply.
Final Thoughts
Hopefully, now you are aware of how to calculate share price. You have also learned about the direct factors affecting them. But there are also certain indirect factors like government policy, economy, political scenario, and more that affect the price of a share.
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The core maxim of investment is to set realistic expectations regarding returns, so you can plan your goals and achieve them. A simpler way to understand the importance of assuming practical returns on investment is through an example.
Difference Between Large Cap and Medium Cap in Stock Market
Choosing the right stocks for trading and investment purposes can be a little difficult and tricky, especially when you are only starting your journey in the stock market. But is it all that difficult? Not if you know what parameters you need to select your stocks.
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