How to Calculate a Stock Price

Buy Strength and Sell Weakness

There are several ways to calculate a stock price depending on whether a stock is publicly or privately held. A stock price is generally the market value that the public appreciation of a company gives it, as opposed to the intrinsic value or its liquidation value.

Things You'll Need

• Pocket calculator or spreadsheet program

Instructions

1. Find the closing price of the stock. Because a stock price of a publicly traded company is constantly changing during the trading day it is difficult to establish a particular price for the per share value of a company. For trading purposes, however, the closing price of a stock is the most important price because it is the price that traders will pay for a stock and hold it for overnight risk. This is the price technical analysis uses to calculate price changes. The open, high and low are also important price calculations.

2. Know that fundamental analysis uses many calculations of stock price. Book value is the value of a company after measuring its reported assets and liabilities. Net worth of a company includes assets that are called "goodwill." These are assets that have value, like the terms Coca-Cola, Hula-Hoop and Frisbee. Stock prices do not always represent the last price at which a stock traded.

3. Realize that stocks trade at a multiple of cash flow. The cash flow per share is the price of a company's sales minus costs before interest charges, taxes and replacement of equipment. The multiple is a function of the current level of intermediate interest rates. A stock with cash flow of $1 in a interest rate environment of 5 percent would trade around $20 ($1/0.05).

4. Use the popular variation of cash flow called the price-to-earnings ratio. Substitute earnings for cash flow. Multiply by the assumption of the expected increase in earnings. Appropriately this is called the multiplier. This is considered the most popular way to calculate stock prices. However, the result is only as good as the ability to forecast earnings.

5. Measure other stock prices such as liquidation value. This is the price of the stock were it to be sold off at auction for the value of assets. Going concern stock prices reflect the replacement cost of a company necessary to achieve the same earnings.

Tips & Warnings

• Understand that stock price calculation is as much art as science. Stock price is different from its market value.

• Earnings may be affected by unusual one-time events such as hurricanes or strikes. Earnings need to be normalized for these occurrences.

References

• Stock Valuation Techniques

Resources

• Calculation of Intrinsic Value