Where Does A Stock's Price Come From?
Updated on March 13, 2019
Now you know what it means to own a stock and why companies sell them, but what about a stock’s price? A stock’s price is simply the perceived value of that company, or in other words, what investors believe the company is worth. Generally, the higher the stock price, the higher the perceived worth of the company. Although, this is not always true due to companies splitting their stocks.
For instance, if 1 share of Sean’s Car Company equals $1,000, the company might do a 4 for 1 stock split to make 1 share worth $250. Doing this would provide more investors the opportunity to buy the stock. If you were an investor before the split and owned 1 share, you would now have 4 shares of Sean’s Car Company worth $250 a piece instead of 1 share worth $1000. Now you have more shares but still $1000 in total value. This is the exact reason why Apple, Microsoft, Google, and Amazon are the most valued companies in the world but have stock prices very far from each other with the prices of Apple and Microsoft around $100 per share and Google and Amazon around $1,000 per share.
Supply and Demand
It is also important to recognize that stock prices change constantly based on supply and demand. When investors believe a company is more valuable than its current share price, the demand for the stock will be high. When demand is high, more people will be trying to buy the stock than sell it. This causes the price of the shares to increase as those who are selling their shares can sell them at higher prices because they are more valuable! When investors believe a company is less valuable than its current share price, the demand for the stock will be low. When demand is low, more people will be trying to sell the stock than buy it. This causes the price of the shares to decrease as those who are selling their shares have to sell them at lower and lower prices just to make a deal.