What Determines the Value of Stock?
While it is kind of obvious to say that the value of a stock is determined by the stock market, that is the reality of the situation. But the reasons why the stock market values a company as it does are not obvious, and the factors involved and the process of how a stock is valued in a stock market are among the most discussed and researched subjects in the financial industry.
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Stock Markets
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Stock markets are basically gigantic auctions where the shares of thousands of companies are bought and sold. The shares of company are listed on a stock market at an initial offering price and after that, the price is based on the supply and demand for the shares. Most stock markets are electronic auctions with bids made by buyers that are matched up to offers made by sellers when they coincide.
Shares and Share Value
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A company issues a specific number of shares when it goes public (become listed on a stock market). Sometimes companies do a secondary offering, which adds extra shares to the total number issued. The total number of shares issued is called the float. One way to think about share value is to determine a total value for the company and divide that number by the total number of shares.
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Company Fundamentals
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The total value of all of the shares of a company is called the market capitalization, and, of course, the market cap changes daily as the price of the company's shares change (or if the company issues additional shares). How much money a company makes in profit after expenses is the fundamental driver of share value, but many other factors like debt-to-asset ratio, current growth, growth prospects and market perceptions all play into the value of a stock.
Market Perceptions
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After fundamentals, market perceptions play the biggest role in determining the current value of a stock. A stock that is perceived as a take-out target, for example, might move up a good bit in share price on the anticipation that another company will pay a premium to take it over even though its fundamental earnings have not changed. Or an oil company that has 80 percent of its wells in a country that just nationalized the oil wells of another oil company might drop significantly just on the perception that they will be next (which might or might not be true).
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