When publicly traded companies issue shares of stock to investors, each of those shares is assigned a monetary value, or price. Stock prices can go up or down depending on different factors.
How stock prices are determinedThe opening stock price of a company is established when the company goes through an initial public offering (IPO). As part of this process, an investment bank will use in-depth financial formulas to figure out how much a company is worth, as well as how many shares will be offered to the public and the stock price for each share. The bank may use comparisons to similar businesses to help determine what a company's stock price should be coupled with other factors such as current and projected performance.
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A company's stock price is determined in part by the total number of shares it issues. If a company is given an estimated value of $200 million, it may issue 20 million shares at a price of $10 per share, or it may issue 40 million shares at a price of $5 per share.
Stock prices and market capitalizationMarket capitalization is a representation of a company's total value. It is calculated by multiplying a company's total number of shares outstanding by the stock price per share.
What causes a company's stock price to change?A company's stock price can fluctuate over time, and it often boils down to a matter of supply and demand. If a company proves itself capable of generating long-term earnings and growth, it can become more appealing to investors, and when this happens, it may see more buyers clamoring to purchase its stock. When a company's stock experiences high demand, its price is typically driven up.
On the flipside, if a company shows signs of financial deterioration, it may prompt shareholders to sell off their stocks, thus reducing demand. When there's an increased supply of a company's stock and a lower demand, the stock price will usually fall.
There are other factors that can cause stock prices to rise and fall as well. If a company becomes the subject of a news or media scandal, stock prices can plunge as a result. Similarly, political events or general market upheaval can cause stock prices to fluctuate for better or worse. Though earnings tend to have a big impact on stock prices, a company might release a positive earnings report but still see a drop in its stock price if outside factors are great enough to drive it downward.
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