The Basics of How a Stock’s Price is Determined

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Many people seem to reference the stock market in conversation, but it seems to me that few of these same people actually know how the price of said stocks are determined. So, what is the most basic explanation of how the price of a stock is determined? A company's worth is determined by it’s market capital, which is the stock price multiplied by the number of shares trading. So, if a stock had a $5 stock price and 10 million shares trading it’s worth $50 million. A company that has a $10 stock price and 1 million shares outstanding is worth $10 million, whereas, a company with $5 stock price and 10 million shares outstanding is worth $50 million. This goes to show that both factors effect it's overall value. Therefore, stock prices are entirely relative. They only represent the percentage changes in market capital at a specific time. As the stock prices change, a companies value changes at the same rate. This is why investors play close attention to these changes. What may seem like a very slim change in a stock price adds up quickly.

Investment companies set and calculate the price of a stock. When a company first goes public they go through what’s called an initial public offering. They hire an investment bank and pay a large sum of money for them to use very complex formulas and valuation techniques to estimate the companies value by determining the amount of shares offered to the public and those shares prices.

FUTURE RESEARCH: In the future, I plan to look further in to how individuals can make money in stock market trading when the prices change so quickly and in seemingly random patterns. 

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