How is the price of a stock determined?

**HUY** · 06-10-13, 04:14 PM

Supply and demand. The price is whatever the parties agree.

**PureGuava** · 06-10-13, 04:48 PM

Originally posted by HUY

Supply and demand. The price is whatever the parties agree.

But in my specific example, 10 people originally bought 1 share at 10 dollars a share, giving them each a 10% stake in the company.

One person decides to sell his stake for $20 per share to a new investor. Is that going to make the price of each stock worth $20?

The only reason that doesn't seem right to me is if we currently take a stock like FB which is trading around 24 dollars a share, and I offer to buy a share for 500 dollars from someone, that's not going to change the stock price to 500.

Is there not a formula for this?

Also, in my original example Company X raises $100 when they issue their shares. Let's say things went sour for them and they lost $50. Would this directly effect the stock price in some sort of mathematical way? Would it lower the price of shares even if nobody decided to sell any of their shares? What I am asking here is if the money the company has on hand has any sort of direct effect on the share of a stock.

**andywend** · 06-10-13, 05:35 PM

The only reason that doesn't seem right to me is if we currently take a stock like FB which is trading around 24 dollars a share, and I offer to buy a share for 500 dollars from someone, that's not going to change the stock price to 500.

Why would you or anyone else offer to pay $500 for a share of FB when it is currently trading at $24/share? If you put in an order to buy it at $500/share, you would be filled at whatever the asking price is (normally 1c or 2c difference between the bid and ask). There are market makers involved with the larger stocks but, in general, the investing community decides how much a stock is trading at. In reality, FB common stock really isn't worth more than 5c/share as the company does not pay dividends and as a common stock holder, you have virtually no say in how the company is run. The entire stock market is a semi-Ponzi scheme.

**eberetta1** · 06-10-13, 05:51 PM

Originally posted by PureGuava

But in my specific example, 10 people originally bought 1 share at 10 dollars a share, giving them each a 10% stake in the company.

One person decides to sell his stake for $20 per share to a new investor. Is that going to make the price of each stock worth $20?

The only reason that doesn't seem right to me is if we currently take a stock like FB which is trading around 24 dollars a share, and I offer to buy a share for 500 dollars from someone, that's not going to change the stock price to 500.

Is there not a formula for this?

Also, in my original example Company X raises $100 when they issue their shares. Let's say things went sour for them and they lost $50. Would this directly effect the stock price in some sort of mathematical way? Would it lower the price of shares even if nobody decided to sell any of their shares? What I am asking here is if the money the company has on hand has any sort of direct effect on the share of a stock.

If the company had $100 sells everything they own for $50 and there were 10 investors, the stock is worth $5 a share, this would be book value. The stock can still sell for $20 on the open market so the closing price at the end of the day is the market value of the last share purchased. Book value and market price lots of times are not even relative to each other as some excited investors just want to be in the same herd as everyone around them.................................... ........................................ ...................................... BTW, Facebooks book value is $4.90 and market value is $24.33. Facebook has cash on hand of $3.92 a share. and I look for earnings, in this case 5 cents a year and multiply by 10 since I want to double my money in 10 years. so I value Facebook at $3.92 and 50 cents no matter what book value is. How much would you value a company earning 5 cents a share? In 10 years it will earn 50 cents. Would you give someone $25 today for 50 cents of earnings in 10 years. Could Facebook afford a dividend payout of a penny per quarter if it only earns 5 cents in a year? Got my numbers from the yahoo finance site ... http://finance.yahoo.com/q/ks?s=FB+Key+Statistics

**wrongturn** · 06-10-13, 06:36 PM

But in my specific example, 10 people originally bought 1 share at 10 dollars a share, giving them each a 10% stake in the company.

One person decides to sell his stake for $20 per share to a new investor. Is that going to make the price of each stock worth $20?

The only reason that doesn't seem right to me is if we currently take a stock like FB which is trading around 24 dollars a share, and I offer to buy a share for 500 dollars from someone, that's not going to change the stock price to 500.

Is there not a formula for this?

Market price is determined by the price a buyer willing to pay, not the price a seller willing to sell. So in your example, If nobody is willing to buy at 20, then its market price won't be that much.

If you offer to buy FB at 500, you will get your shares at price between 24 to 500, but then the market price will be reset to whatever the bidding price after your trade, mostly likely still around 24.

Also, in my original example Company X raises $100 when they issue their shares. Let's say things went sour for them and they lost $50. Would this directly effect the stock price in some sort of mathematical way? Would it lower the price of shares even if nobody decided to sell any of their shares? What I am asking here is if the money the company has on hand has any sort of direct effect on the share of a stock.

A company's book value is different from market value. In your case, its book value is reduced, but not necessarily its market value, which is mostly influenced by investors' expectation on the company's future.

**InTheRed** · 06-10-13, 06:47 PM

Originally posted by PureGuava

But in my specific example, 10 people originally bought 1 share at 10 dollars a share, giving them each a 10% stake in the company.

One person decides to sell his stake for $20 per share to a new investor. Is that going to make the price of each stock worth $20?

The only reason that doesn't seem right to me is if we currently take a stock like FB which is trading around 24 dollars a share, and I offer to buy a share for 500 dollars from someone, that's not going to change the stock price to 500.

Is there not a formula for this?

Also, in my original example Company X raises $100 when they issue their shares. Let's say things went sour for them and they lost $50. Would this directly effect the stock price in some sort of mathematical way? Would it lower the price of shares even if nobody decided to sell any of their shares? What I am asking here is if the money the company has on hand has any sort of direct effect on the share of a stock.

Your example is flawed. And there is no formula for it. There is an established market value, it moves by pennies or fractions of a penny at a time. The price of the stock is the perceived value of the stock.
The way the market works is with Bid and Ask prices. These are different than the actual price. The Bid and Ask are what drives a price up or down, and its solely based on supply and demand of the stock.

When there are more people that want to buy the stock, the sellers are able to get what they want for the stock, which then moves the market number up. And Vice Versa.

Now your original question is probably more related to how the market price is determined. There probably is a formula and such, but with IPOs its all speculative and done by a small handful of people.

In the FB example, their IPO was 38. When it opened people flooded the market with buy orders. This moved the stock up to around 42. But then everyone had bought the stock. At this point, the sellers flooded the market. This drove the price all the way down to 18ish. And now its slowly working itself back up. Over the last month or so, its been steady in the high 20s. Which is basically where the market thinks it should be worth. This was all done by buy and selling billions of shares within pennies of each other.

The price only changes when a lot of one type of order comes in over and over.

**PureGuava** · 06-10-13, 07:22 PM

Thanks for the responses.

I don't want to get into the concept of book value at this moment, I first want to understand market value and the very basics, since I'm very new to all of this.

Let's say in my original scenario that I decided to purchase a share from someone for $20, meaning that I'm currently the highest bidder. Is this what will determine the actual value of the stock?

EDIT: Actually, book value is just what the company is worth, such as cash on hand, assets, etc.? Is that right?

**PureGuava** · 06-10-13, 07:35 PM

Am I right in saying this:

The stock's current market value is based on what the highest bid is?

**Phildo** · 06-10-13, 08:01 PM

The value you see on a website will usually be the last price the stock was actually sold at. a stock is only worth what someone will pay for. if you want to buy a stock for 20 that is worth 10, someone will sell it to you, but it isn't actually worth 20 unless someone else will give you 20 for it.

**wrongturn** · 06-10-13, 08:35 PM

Originally posted by PureGuava

Am I right in saying this:

The stock's current market value is based on what the highest bid is?

Pretty much it is. Normally traded stocks are very liquid, so whether market value is calculated based on last sold price, bid price or ask price does not matter much, as they are very close to each other. But to explain to you that market can not be decided randomly just by whatever a shareholder wants to sell, using highest bid price is much more appropriate.

**eberetta1** · 06-10-13, 11:13 PM

Originally posted by PureGuava

Thanks for the responses.

I don't want to get into the concept of book value at this moment, I first want to understand market value and the very basics, since I'm very new to all of this.

Actually, book value is just what the company is worth, such as cash on hand, assets, etc.? Is that right?

Yes,book value is just what the company is worth. I once bought a stock at book value($17) that weeks earlier the stock was being bought and sold for $60. I thought I was so genius. Found out after they sold off all their assets, book value was $2. So accountants will prop up book value for companies that write their paychecks.

**toga toga** · 06-11-13, 06:23 PM

First - do not confuse book value with share price. People invest based upon future value of a company. That is why Facebook has a high valuation or stock price. In determining a stock price you should think of it like a money line. There is a bid and an offer price which are different and generally a few cents apart. As one side gets filled the price will change accordingly. No different than a money line. If you place a limit order, you are stating the price which you will execute the trade as investors buy and sell the stock the price will be determined by the level at which an investor will execute their side of the trade. The price will adjust as the demand to buy or sell fluctuates.

**tevari** · 07-16-13, 10:21 AM

Originally posted by toga toga

First - do not confuse book value with share price. People invest based upon future value of a company.

This is of paramount importance. Intrinsic value vs book value (and the underestimation of the former) is one of the biggest mistakes novice investors make. There are a few methods of valuing a firm in totality as well as projecting cash flows, which is pretty significant in trying to estimate the overall health of the firm compared to what's on their books.