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What Determines Stock Prices?

To understand what determines stock prices and why stocks a good investment, you must step back, remove yourself from the excitement and energy of the market and contemplate the following point. Ultimately, the value of a security is whatever you can sell it for at that moment. Plain and simple.

You may have certain "feelings" about the future value of the stock, but the value of a stock at any given moment is what the last investor was willing to pay for it.

Stock Price is what somebody has just paid in that moment.

Price varies throughout the day because market participant's "feelings" about the future value of a stock are continually affected by information about that specific company, about the sector that it is in, by changes in the broader market, and by changes in the world.

Price is a result of the "bid" (the price someone is willing to pay for a stock) and "ask" (the price someone is willing to accept for a stock) and the ultimate agreement of those two market participants.

For example:

  • If someone is willing to pay $5.15 for XYZ stock, but no one is willing to sell at $5.15, then there is no "agreement" in stock value and therefore the price is NOT $5.15.
  • If someone is willing to accept $5.30 for XYZ stock, but no one is willing to pay $5.30, then there is no "agreement" in stock value and therefore the price is NOT $5.30.

It takes the eventual agreement of market participants to determine price at any given time. It is the eventual "agreement" between the "bid" and "ask" prices that cause a stock transaction to occur at a specified price.

To continue the example, the following scenarios may occur:

  • If the buyer is eager to purchase the stock, he/she may accept the ask price of $5.30.
  • If the seller is eager to sell the stock, he/she may be willing to accept the bid price of $5.15.
  • The "spread" (the difference between the "bid" and "ask") may narrow for the eventual agreement to occur. So, the bid may rise to $5.20 and the ask may drop to $5.25 and so on until the eventual agreement is made at $5.23 which becomes the value of XYZ for that moment.

Stock Price at any moment is the point where "bid" = "ask".

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Words from the Author

Remember, it is the change in price that we are looking for. Why would we want a stock that is not moving up, or worse, moving down? To make money, we look for stocks that are moving up and moving quickly!

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