How is the stock price determined in the stock market?

The trading of stocks and bonds by buying or selling, is one of the financing tools in the capital markets around the world. As the subscription in the prices of shares and bonds provides the necessary financial liquidity for the company or institution in a certain period of time.

In order to offer the shares, which are essentially part of the capital of any company, an objective evaluation must be made, on certain scientific grounds, of the value and prices of those shares. Especially since there are several ways to measure the values ​​of different shares, the first of which is the book value, then the real value, in addition to the value of the stock in the market, or what is known as the “share market value”.

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It can be said that stock prices depend on a variety of economic, accounting and political factors, but in the end the price is determined at any moment due to demand and supply conditions during a certain period of time.

Short-term investors will look at inflation trends and economic factors to make their own trading decisions, while in the long-term they will focus on the company's performance and the assumption of long-term profitability.

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How do we know the value of shares before trading in the stock exchange?

The first factor in determining the stock price is the price-to-book value ratio of the stock, which means the value of the company if it were sold today. The book value of the share includes an inventory of the company's assets, including equipment, buildings, and land it owns, in addition to various other assets such as bonds and others, or even current assets such as the trade name.

From an accounting point of view, the lower the price-to-book value ratio, the better it is to protect the investment in the company. If the ratio is accurate, this prompts many investors to study the company's assets before buying shares in it.

In addition to book value, the value of shares can be measured by knowing the price-earnings ratio. It can be said that this ratio reflects the time it takes to invest in any shares of the company to recycle the capital again.

The price-to-earnings ratio determines the ability of a stock to maintain its price after a rally. As the absence of profits to support the rise in the stock price means that its price will return to its decline after a while.

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What determines stock prices?

On the other hand, company stock prices fluctuate constantly and are affected by the company's performance and profitability, as well as the performance of the market in general, in addition to the general sentiments towards the company, which greatly affect the investors' view of the stock in the future.

supply and demand conditions

The main factor that determines the stock price is supply and demand. Supply refers to the availability of a certain share of the stock in the stock market, while demand refers to the desire to do something by buying or selling against the quantity supplied of the stock. Also, low supply and high demand raise the stock price, while high supply and low demand reduce the price.

Thus, when the news and financial reports of the company show a good performance of a company or it expects growth in its sector, the demand for its shares grows and the share price rises as a result.

On the other hand, negative news and expectations lead to lower demand; Investors will be less likely to buy shares and more likely to sell them, which in turn will increase the supply of market share and thus lower the price.

The supply and demand for a stake is influenced by a number of factors.

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Corporate performance and trust in funders

Publicly traded companies in the stock market are required to publish reports that include their earnings, current cash flows, and performance forecasts, over a certain period of time.

These reports of the company affect the supply and demand for the company's shares. As the good performance will increase the demand for its shares, and the bad performance will lead to its decline and lower prices.

Dividend announcements can also affect the share price. If the dividend is higher than expected, stock prices tend to increase.

Internal management and external relations in the market

The management and internal relations of the company or institution play a role in the investor's attitude towards the company's stock, which in turn will affect the share price. Whether the driving is capable and stable, or not. As the company is known to have a strong social responsibility policy, it is generally considered a company that is likely to continue to be successful in the future.

The general state of the economy in a given period of time

Stock prices tend to rise during economic booms and tend to fall during recessions. Interest rates also affect stock prices.

In lower interest rate environments, investors will generally look for better returns in riskier assets. This also leads to an increase in inflows into the stock markets.

Conversely when interest rates are higher, investors will take higher rates offered because of the lower risk involved in the investment. This also leads to a decrease in the demand for stocks.

In addition, inflation affects the purchasing power of the company, as well as the ability of its dealers, and therefore inflation rates may cause stock prices to move accordingly.

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Political and legal factors and circumstances

Political factors also have a role in determining stock prices since the environment in which companies operate is affected by various environmental factors. Politics also has a direct impact on international relations, monetary, financial and economic policies, the enactment of laws such as taxes of all kinds, and many other aspects of the economy.

All of these political factors affect the company's ability to conduct its business and commercial activities, the price of its products, marketing and distribution, and all of these factors have a strong impact on the company's performance and thus have an impact on its share prices.

Market sentiment and dealers

A large number of analysts and specialists add market sentiment, or what is known as the collective psychology of investors, to the factors that determine the stock price on the stock exchange.

Market sentiment depends on a number of factors, the most important of which are the news circulating about the company, or the reputation of that company and rumors circulating about that company's share in the market. The share price may also rise or fall according to the psychological state of dealers and investors.