How are stock prices determined?
Find out how stock prices are calculated and why they fluctuate.
A share price represents the current value of a single share in a company on the stock market.
The price fluctuates according to market conditions, rising when the company does well and falling when it doesn't meet expectations.
What is a share price?
A share price, also known as a stock price, is the cost of a single share in a company listed on the stock market.
The share price is not fixed, it fluctuates with market conditions and whether a company is either performing or not.
How are share prices calculated?
A share price starts with an initial public offering (IPO). The price is agreed between the company and investment bankers and the final number is based on valuation and perceived demand for a company's stock.
Once the IPO is complete, the company's share price fluctuates when buyers and sellers exchange money for share ownership.
The price will rise when there are more buyers (demand) than sellers (supply). By contrast, the price will fall when there are more sellers than buyers.
Why do stock prices go up and down?
Stock prices rise and fall according to company performance, general supply and demand, investor sentiment and various economic factors.
Company performance
If a company does well, the price will rise. Investors will always keep an eye on company revenue, profits and the price-earnings ratio (P/E).
The P/E shows the stock relative to earnings, shown as stock price divided by earnings per share. So if a company is trading at £10 per share and its earnings are £1 per share, the stock has a P/E ratio of 10/1.
If a company's P/E ratio is higher than it's average ratio over the last few years, then it'll generally be more attractive to investors.
Supply and demand
Buyers and sellers are constantly bidding and asking for new prices, this causes stock prices to move up and down.
Market or trader sentiment
How investors 'feel' can affect stock prices, and even the market as a whole. From a housing crisis or pandemic to a tech billionaire controversially buying a media company, investors can be easily spooked. This in turn can cause anything from spikes in market activity to market crashes.
Economic factors
As well as company data, stock prices are influenced by the performance of national or global economies. An interest rate rise, a drop in inflation or GDP growth will trigger market movement making prices either more or less attractive to investors.
How to keep up with stock prices
Research
The key to a successful investment is research.
Think about what the company you are interested in makes or does. What part of the world do they operate in? How big is the company? Is the market volatile?
All this information is easily found online and will help you understand the landscape you're investing in.
Read more about how to research stocks and shares.
Use professional guidance/experts
At ii we have a team of experts putting out analysis every day. Charts, data and understanding the investment strategies of successful investors can help steer you in the right direction.
Read our latest news and analysis.
Stay up to date
Keep a close eye on your investments as markets can change rapidly. What looks like a strong investment one day might turnaround within days, weeks or months. It's important to remember that investments always go up or down, this is part of the risk of investing. If you're in any doubt about the suitability of an investment, you should seek independent financial advice.
Watch our video on: How long do I need to invest for?
Learn more about investing
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