Definition of Market Price for Stock and Examples of It
The market price of a stock, or “stock price,” is the most recent price at which the stock has been sold. It is the result of market forces, where it occurs when the buying price that a buyer is willing to pay for the stock meets the price that a seller is willing to accept for the stock.
Key points:
- The market price of a stock tells you the last price at which one share of the company was sold.
- Market forces push the market price up and down throughout the trading period of the day.
- The market price of a stock is used to determine the market value of the company.
How Does the Market Price of a Stock Work?
The market price of a stock simply refers to the most recent price of one share in a publicly traded stock. This is not a fixed price – it changes throughout the trading period due to various market forces that drive the price in different directions.
For the average market observer, the market price of a stock is the number shown next to the specific stock symbol. When a trader places a market order to buy or sell a stock, it will be executed at the market price.
The Impact of Supply and Demand on the Market Price of a Stock
Unlike the value of a stock, the market price of a stock has no specific relationship to the value of the company’s assets or any other information in the list of assets and liabilities. Instead, the market price of a stock is influenced by supply and demand.
When more people are trying to buy a stock rather than sell it, the market price will increase. Conversely, when more people are trying to sell a stock rather than buy it, the market price will decrease. These actions can be driven by the company’s fundamentals, such as good or bad news released in the quarterly earnings report. Supply and demand can also be influenced by non-financial factors, such as controversies surrounding the CEO, new laws from the government, or natural disasters.
Since many ordinary investors trade through an app or a broker’s website, it is easy for them to lose sight of the fact that every order they place in the app is actually a real transaction with someone else. Traders might need to find a partner to execute the order – the seller needs to find a buyer, and the buyer needs to find a seller.
Technically, the seller offers a “bid” price they want to sell at, and the buyer offers an “ask” price they want to buy at. When the bid and ask prices meet, the market price is established and the transaction is executed. When market forces push the stock price down, the seller may be willing to come down on the ask price, and the market price drops. Conversely, when market forces push the stock price up, the buyer may be willing to pay a higher bid price, and the market price rises.
Market Capitalization
A common mistake among novice investors is to compare the market price of stocks between two companies. When Company ABC trades at $10 per share and Company XYZ trades at $1 per share, it may initially seem that Company ABC is more valuable, but this is not what stock prices tell you. To compare the value of these two companies, you need to use a measure known as market capitalization.
The market price of a stock is used to determine the market capitalization of the company, or “market value.” To calculate it, multiply the latest stock price of the company by the total number of outstanding shares. This is a simple way to assess the company’s value to traders at that moment. This value changes with market forces, just like the market price.
Note:
When journalists or analysts refer to a company’s value, they are usually referring to market capitalization. If someone owns all the shares of the company, they could, hypothetically, sell all those shares at that value.
For example, let’s assume that Company ABC has 1 million shares outstanding and Company XYZ has 100 million shares outstanding. In this case, the market value of Company ABC would be $10 million (1 million shares × $10 per share) while Company XYZ would be valued at $100 million (100 million shares × $1 per share). Although shares of Company XYZ are cheaper, that company is worth more according to the market.
Market Price Per Share vs. Book Value Per Share
Market Price Per Share vs. Book Value Per Share
| Market Price Per Share | Book Value Per Share |
|---|---|
| Determined by investor sentiment | Determined by the value of the company’s assets |
| Changes frequently throughout the day | Changes quarterly when companies update their financial statements |
Beginner investors may also confuse the market price per share with the book value per share. While market prices change with investor sentiment, book value refers to the specified value of a particular asset. For example, a t-shirt produced by a company might be worth $20, so the book value of that t-shirt is $20.
The company can determine its net asset value by subtracting its debts and liabilities from the total value of all assets it owns. For a company producing t-shirts, these assets might include the inventory of t-shirts, the manufacturing equipment needed to make the t-shirts, and the property owned by the company to store the t-shirt inventory. The net asset value may also be referred to as “total equity.” Since public companies are owned by shareholders, total equity may also be referred to as “shareholder equity.”
By dividing the company’s total equity by the number of outstanding shares, you can calculate how much of the company’s assets each shareholder is entitled to, which is also known as the “book value per share.”
This is useful for investors, especially value investors, because they can compare the book value per share with the market price per share to identify potential opportunities. This is known as the price-to-book ratio. It tells you how much of the company’s assets you are getting for every dollar you spend on the share.
Frequently Asked Questions (FAQs)
What is a good price for a share?
Determining a “good” price for a share is a highly subjective process. If you believe strongly in the business, you may be willing to pay more than someone who is not convinced of the company’s financial strength. Each investor must decide for themselves what a “good” price for a share is.
Where can I find the stock price of a company?
Most online brokers and market news sites will display the current stock price. Many also allow you to track historical stock price data to monitor movements and identify trends.
Source: https://www.thebalancemoney.com/what-is-the-market-price-per-share-393220
Leave a Reply