Q: What determines a stock’s price?
A: A lot of factors can play into a stock’s price at any given time, but in short, it ultimately comes down to the asking price for the stock and the price of the bid a buyer puts down for it.
A stock’s price is contingent on what the perceived value of the stock is. Say a stock is priced at $50 but is believed to be worth only $40; that makes it overvalued. On the contrary, it is considered undervalued if it is believed to be worth more than $50, say $60.
This illustrates the difference between a stock’s current price and its perceived value. Many investors strategize in identifying securities that are currently undervalued in the market: if they buy a stock at a low price now, and it increases in value over time, they may garner profits on their investments (and when you sell a stock after its value has increased it’s otherwise known as a “capital gain”, or “capital loss” if the stock value decreases– more on that here).
This dance of supply and demand in relation to the amount of shares available ultimately determines the sweet spot of a price at any given time.
In a philosophical sense, stock itself may be valuable because it’s essentially placing a vote in the company you’re investing in. Buying stock in your favorite company, for example, can be interpreted as saying:
- “I believe in this company, and want them to succeed.”
- Or, “I think what this company does is great, and they are likely to grow over time.”
- Or, even simply “I like what I’m hearing about this company in the news.”
In the event that the company stock value increases — for whatever reason — it can increase the value of your portfolio. Likewise, if the company stock price drops, you’ll see that decrease in your own stock value as well.
In a more literal sense, stock is valuable because you are buying a portion of ownership– ownership in a company. The price is determined by how valuable those investors or prospective buyers perceive that company, stock or asset to be.