The very nature of investing in stocks carries risk. That is what makes it both exciting and stressful. Because the price of a stock is a snapshot in time, giving little indication of future performance, that figure must always be taken with more than a grain of salt.
Share prices, after all, are subject to numerous variables, few of them invoking cold logic and sound reason. So, getting a handle on a stock's true value benefits all buyers and sellers. Though hardly an exact science, obtaining a reliable market price for a share of a company's stock is not impossible.
Read More: Market Cap Vs. Market Value
Why Is Market Price Important?
Consumer and economic surpluses are calculated by means of market prices. Representing the difference between what a stock, or any asset, is selling for, i.e. the market price, and what investors are agreeable to pay, the consumer surplus is related to the producer surplus. The latter reflects what producers make when selling at the market price.
Totaling consumer and producer surpluses together gives analysts the economic surplus. This latter figure helps to forecast how prices might rise or fall in the future. Thus, the market price is an important factor in economic planning.
Read More: What Is Market Value of Stock?
What Makes Market Prices Move?
With stocks, commodities and every other asset, supply and demand are the primary movers of market prices.
Shocks to supply, for instance, tax cuts, earthquakes, steep drops in interest rates, political upheavals and government stimulus, affect the availability of assets, goods and services. Demand shocks, on the other hand, can heat up or chill the desire for an asset and are typified by volatile energy prices and advances in technology. Such events can create either caution or confidence, fear or optimism. In the end, market prices move with public attitudes.
Factors That Determine Market Price
Being the most recent price at which a stock or other security is traded, the market price is, as noted, a function of supply and demand. Accordingly, it results from bids on the part of buyers and offers on the part of sellers. The former is essentially the highest price at which a purchaser will go whereas the lowest price for the seller is the offer. These, then, are valuation metrics for stocks.
Unless the buyer accepts the offer or the seller accepts the bid, there will be no trade. So, the market price is the amount at which a stock is trading at any given moment.
Calculate the Price-to-Earnings Ratio
To determine the ratio of market price to actual earnings (P/E), the latest earnings statement from the company in question is necessary. This can be ordinarily found online at Yahoo Finance or any number of financial sites. Alternatively, you can simply type in the ticker symbol into a search engine.
The P/E ratio is the quotient of the share price and the current quarterly earnings per share. This numerical relationship helps companies and investors know what the market is willing to pay at present based on past and future gains.
Read More: The Importance of a Price/Earnings Ratio
Market Capitalization Calculation
Of all the valuation metrics for stocks, market capitalization is the most holistic, i.e. giving an indication of the company's overall size and worth. The calculation is simple. To do so, multiply the share price by the total number of outstanding shares.
Companies are categorized to where they fall in the "market cap" spectrum. Small-cap companies, for example, are those valued between $300 million to $2 billion, while between $2 billion and $10 billion are mid-cap. Large-cap businesses are those that value in excess of $10 billion.
Read More: How To Calculate Market Cap
- Keep in mind that stock markets are forward-looking and always evaluate a stock for its expected future performance—not just its current performance.
- If the price of a stock starts to fall, shareholders may dump the stock, in which case the price will fall lower. Unhappy continuing shareholders may effect changes in management, which may affect the market price.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.