Stock market basics

Who Decides a Company’s Share Price

There is a very commonly asked question by beginner investors. Beginners often ask questions like, how share prices change on daily basis? Why share price change? Or, who decides the price of a share at a particular moment?

The simplest answer to all these questions is that the price of a company’s share is decided by supply and demand of that stock in the secondary market.

This is called the free float market. When the demand for the stock increases (there are more buyers than seller) its price goes up and when the supply of the stock increases (have more seller than buyers) its price goes down.

The shares are bought and sold (exchanged) on different stock
exchanges. The stock exchanges are meeting places for buyers and sellers they match buyer’s and seller’s prices in real time. The price at which most of the exchanging executes will be the market price of that stock at that particular moment. It may be possible that a company’s stock is listed on more than one stock exchange. In that case, the stock price of the company may be different on different stock exchanges. Because each stock exchange matches its buyer’s and seller’s price independent of other stock exchanges.

For example you can simply check the stock price of Tata Motors Ltd. at NSE and BSE (click here to get BSE and NSE quotes) Or share price of Apple Inc. at NYSE and NASDAQ (click here to get NYSE and NASDAQ quotes) at this particular moment, you will get slightly different stock prices on both stock exchanges. Because Tata Motors is listed on both stock exchanges so you can simply trade its shares at any of the both stock exchanges at your will.

You can also check the share price of Microsoft Ltd. on NYSE and NASDAQ, interestingly Microsoft is not listed on NYSE (NYSE is the biggest stock exchange in the world) so you cannot trade (buy or sell) Microsoft’s shares on NYSE.

To trade on any stock exchange you need to open a trading account with a broker, who should be a member of that stock exchange. Brokers put your buy and sell orders on the stock exchange. The broker gives its customers option to place different types of orders in the stock exchange. Anyone trading in the stock market should be aware of different types of orders.

When the demand for a stock will increase or when the supply of a stock will increase, finding this is an art in which investors try to proficient all the time.

There are so many factors that decide the supply and demand of a stock. But the conclusion to all these factors is that mostly
the business who is going to generate profit in the long term or short term will gain more demand. So, if positive news comes about any company its stock will go up. But sometimes the stock price of a company which is not generating money Or having no profit, can also go up sometimes due to an expectation of future profit or just due to over expectation. But when the price of a stock goes up due to over expectation it will become a bubble and will experience a correction (bubble bust) earlier or later.

Investors all around the globe have developed various strategies to predict the price (supply and demand) of a stock. If you ask any single investor about their stock selecting strategies, you will find every investor has their own strategies and methods for stock selection. Some follow the fundamental analysis, some technical analysis, and some use different types of charts. It may be possible a strategy that works for one investor does not work for other. You may develop your own strategy by learning more and more about this dynamic market.

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