How Is the Price of a Stock Determined?

Video Transcript

"Hello, I'm Roger Groh with Groh Asset Management. Today we're here to talk a little bit about how the price of a stock is determined. Well in the old days in the United States, and currently still in many countries around the world, it was two people facing one another, one trying to buy a share and one trying to sell a share and coming up with an agreement of what their price should be, it wasn't very fancy, but it sure worked really well. The problem is that it doesn't work in a big volume environment, and certainly it doesn't disclose to everybody what's happening in that stock, so you can come up with rigged markets for instance without that disclosure. As a result of that, trading then moved into the computerized world, where instead of two people discussing it you had multiple computers looking at it, really the same thing, where you have some number of people on computer looking to buy, some number on a computer looking to sell, probably a stipulated price, and see if somebody will actually buy or sell at the price the other side wants to do the transaction at. Now in today's world there are lots of limits on how much a share can move up at any one point or down at any one point, just to bring balance and consistency into the system. But it's still two entities meeting deciding whether or not a price is real or not, and incidentally in many cases, even though it's a computer, there's somebody in live time on both ends of that computer deciding whether to make that transaction or not. So it's sort of like being there in person, but just in a bigger scale. I'm Roger Groh, and that's a little bit about how stock prices are determined."