Stock prices are always fluctuating in the financial markets as traders and investors buy and sell publicly traded companies based on what they believe those companies are worth. Because much of what drives a share price has to do with emotions and other unpredictable factors, calculating the market price of a stock is not exactly a precise science. There are some tools, however, that enable investors to form a good ballpark estimate of what a stock is worth.
Find out the company's current share price. You will need to know the the stock's current market price in order to calculate its price-to-earnings ratio, which is also known as its P/E ratio. The P/E ratio tells you what the market is willing to pay for the company's earnings. It is the most popular tool in stock analysis.
Look at the most recent earnings statement reported by the company. This can usually be found on Yahoo! Finance by typing in the stock's ticker symbol and searching its financial information. Divide the current share price by the company's current quarterly earnings per share to find its P/E ratio. For example, a company with a share price of $50 and an EPS of 10 would have a P/E of 5. The P/E is a good gauge of the relationship between the stock price and the company’s earnings.
Determine the company's market capitalization by multiplying its share price by the number of shares outstanding. Investors use this figure to determining a company's size. Since owning stock represents an ownership stake in the company, including all its assets, market capitalization is another important measurement of a company's net worth and is a good determining factor in stock valuation.
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.
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