Trading 101: How is a Stock's Price Determined?
I received this question from a YouTube follower, and despite it being potentially obvious to someone involved in the stock market for a longer period of time, it's a great and valid question. How exactly is a price of a stock determined? What goes into causing a stock price to fluctuate up and down in price? The good news is, the "how" and "what" is very straight forward.
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I see that the value of shares keeps rising and dropping every few seconds. Does that mean that there is increase and decrease in the number of people who want to buy that particular share and who want to sell it? Is that what causes the values of a share/stock to keep changing constantly?
The irony is Tobacco companies share prices increases year on year eventhough many studies or awareness campaigns held on the danger of smoking. Everyone is like, I want the British Tobacco shares, put me in 10lots. What weird world we live in
Thanks for your video and time. My question to you: I'm currently invested in an energy sector stock that is doing really really well, it has great fundamentals, and increasing institutional investors. Now, my understanding is that high volume accumulation on a stock causes the price to increase (demand) but, I'm noticing that this stock is surging up in price on below average volume days.... how is this possible? Why is the price going up when no one is buying it on that day?
So basically stocks are basically Pokemon cards. Everyone trades them, but they have no other purpose otherwise (since no one ACTUALLY plays games with them and stocks don't do anything).
Almost like a pyramid scheme. Everyone buys the skincare products, only to one day sell it to another person for hopefully a higher price. And no on ACTUALLY uses the product.
ClayTrader, you may have described the cause of a stock price going up and down, but what you didn't do is explain how the price is actually determined. For example. Apple stock is currently trading at $178 per share. Who or what set that exact number? Algorithms, simple math, a broker, etc. If I own a product (say homemade apple pies), I myself set the price based on the cost of the materials I use to make them and the time (labor), plus quality. And if the demand for my pies increase so much, that I can (and may have to) increase the price due to the fact that the pies take time to make. I am now setting the price based on what I think someone is willing to pay. But it's ALL me myself and I setting the price. Who/what sets the price of a stock?
what about the value of the company? Does this means the companies like apple and google, their market value are not the real value for them. beside they are more like bitcoin which all of its value was given by people( investor)?
Ok, I get the supply and demand thing.
But does the value not have a relation with the profits of a company?
Because if I may believe some advise I got is quote 'you should buy a stock only if it is below its intrinsic value'.
thanks for your reply
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It's all supply and demand. Rationale would say that the more profits a company has, the more people "want it", so therefore prices would go up, but that's not always the case. This is what makes the markets so challenging.
What other factors are there? Because ive seen a stock have no news and regular volume sky rocket. Then ive seen good news and added volume do nothing. I'm watching one right now that has heavy volume and its going down with no news...
This video just states the obvious.
But for those of you who are actually curios on the exact mechanics, the open price is calculated by the stock exchange like the NYSE for example.
Every morning they set the opening price by taking pre opening orders and offers.
the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.
The calculation of prices is completely automated, software driven, and anonymous at the specific exchange, and the price is calculated by electronically matching bids and offers for a particular share recorded an electronic limit order book (ELOB).
When you place an order to buy a share at a certain price that is called your “bid” and when you place an order to sell your shares at a certain price that’s called your “ask”.
The ELOB contains all the bid – asks for a particular share and the system matches the best bids and asks to execute an order. The price at which a transaction is executed is called the last traded price (LTP) and that’s what you see on TV screens.
الكئيب Your answer needs to be framed on my wall. Thank you. This is exactly the answer I was looking for. The video, of course, uses the terms "supply" and "demand" and your terms "bid" and "ask" are essentially correspondent to it. The Stock exchange is basically an auction clearing house for company shares. Lots of people are "bidding" for shares and the stock exchanges already have the information for those pre-orders or bids on their databases and they simply update these figures and these are what we see on all those TV screens. Now of course there are other factors at play like people's perception of the company but now relate this to my analogy of the auction (one or two people start walking out the auction room because they feel the company shares aren't worth it and this influences everyone else who are reluctant to bid the company shares even if those shares go down). When the people in the auction room have a high demand (or when the supply goes down), the prices go up because you want to sell something for the highest price. When their demand goes down (or when supply goes up), the price goes down.
These videos from Udacity wont explain the price decision factor but there is something called as order book which every stock exchange manages.. More on it here...https://www.youtube.com/watch?v=_0KVAfy49h0 watch related videos
Supply and Demand. That is exactly what makes it move! Since the 1800's! What makes the demand for the stock is variable and the demand to sell it is also variable. But the simple answer is Supply and Demand. Ask any professional trader.
These videos from Udacity wont explain the price decision factor but there is something called as order book which every stock exchange manages.. More on it here...https://www.youtube.com/watch?v=_0KVAfy49h0 watch related videos
Right. Where does the exact price of a stock come from though? Its all a computer calculation now correct? So when a stock moves from 5.51 per share, to 5.73 per share, what specifically determines this move and how are those exact numbers calculated?
+Robin Napoleon People are negotiating between one another between buy orders and sell orders. There is no algorithm that makes the market price, it's the people that are bidding or selling. No one magically makes up a number from NASDAQ and says this is the price now. It's exactly as olden times, where people would go in a room and start bidding, except now with computers we can expand this bidding war to everyone around the world.
At an auction house, the highest bidder wins, and the sellers HAVE to sell. In the case of a market, you do not have to sell. You have multiple bidders and multiple sellers. If you wanted to sell your share at 100 and the market value is currently 50, you do not have to sell right now, you can wait til it goes up (if it even does). Now, you are wondering WHY is it 50, it's because there are people willing to buy and sell it at 50 dollars. It meets the middle ground of buyers and sellers, and when you have millions of people trading, this middle ground changes constantly on the day. If 1 person bought at 50$, that doesn't mean everyone has too. Prices change as time progresses because of news. It goes back to supply and demand. Now, you talk about private negotiations. This would never happen in bigger companies for reasons that, If someone wanted to buy a share for 1$, but the market is currently 2$, who on earth would privately sell for 1$ when they can get 2$ for it. This basic understanding leads to how the market price is found. Market Price is the CURRENT selling/buying price because that's what BOTH sides are willing to buy/sell at this moment. It's a war between sellers and buyers. Also, you say 1$ is a low and 100$ is higher like it matters what someone uses as an example. Mathematically, 100 is higher but in the market prices it doesn't matter, only the percent changes matter. If I wanted to use 1$ as an example, it can be the same as using a 100$ example. Either will work. If I said I put a 1,000$ into a share that costed me 1$ and it increased to 2$. I now have 2,000$ or a 100% gain. The same can be explained if I put $1,000 dollars in a 100$ market, and it increased to 200$ which is a 100% gain. Exact same as the last example, I will have a $2,000 account. Just because a stock A is worth 1$ and stock B is worth 100$ doesn't mean that stock B is more valuable than stock A. It comes down to the number of shares they have. Stock B could have 1 share total, and Stock A could have 1 million shares total. If you do the math, Stock B is worth 100$ and stock A is worth a million even the the price per share is lower.
Nicholas Glatter So if I have a share with a market value of $1 in a publicly-traded company listed on a stock exchange, how do we know that there is someone out there who is (or is not) willing to pay $1 for it? Just the market value on its own says nothing about how it was determined. No use saying that a share is worth $1 and no wants to buy it, and no use saying a share is worth $1 because someone wants to buy it. The price of $1 as used in this example is cumbersome because $1 is a low price, so let's rather say that I have a share with a price of $100. This means it's valuable and people demand it. How do we know this? How do we know whether people will buy it or not? You can give out an arbitrary number to a share and it will make it "more valuable" and therefore boosts the demand for it even though members of the public don't actually want it. For instance, someone at NASDAQ sitting behind a computer can suddenly type $250 as being the share price of Apple shares even if no one actually had a "higher demand" for it and no one would flinch to see this price. So just having people demand something doesn't increase its value. I think the stock exchange is more akin to an auction house where shares are constantly being auctioned and the highest bidder buys it. Occasionally you find that there are hardly anyone who are willing to bid for a specific share and then it goes to the next highest bigger (which might be "lower" in terms of the price of other, more valuable shares). So if we have 100 people in a room bidding for a share they really want and the highest bidder takes it for $200, and no one else bids anything higher, then the hare is considered to be worth $200. But if we have 100 people and only one or two people bid for a specific share and it gets sold for $10, then it's share price is $10. So the people constantly fighting against each other and negotiating is what determines the share price of a particular. But this method applied during historical times. In the modern day, complex algorithms and computers determine the share price and the question is how, exactly, do they do this if people aren't negotiating head-on with each other.
Mike _ I think the historical method was better because it was like buying any other asset (like a car or a jacket). All those who wanted to buy shares (the potential buyers) would meet up at the stock exchange and negotiate with the sellers of those shares and they would determine what would be a fair price to pay for the specific share/s and what the fees would be (if any middle-men are used to facilitate the sale). If the shareholders themselves were present, there would be no fees. However, the problem is that if there are thousands (or millions) of shareholders who would also be eager to buy (or sell) their shares at the price agreed upon by those one or two sellers and buyers negotiating in private, would they (the sellers and buyers) be obliged to sell (or buy) for the same price for all those other thousands (or millions) of shareholders? Or would the sale be a once-off transaction?
Hi im mohsin.can yu plz guide me hw can we determine actual price of stock cze its happened with some companies in pakistan that they increase their stock value and in actually their cimpany demand is not much.so guide me in this matter
well i had the same question but your answer did nothing to address it. What newbies want to know is literally WHO sets the price and HOW? No one is so stupid that they need to have supply and demand explained to them OMG. What I would like to know is who is the guy inputing into the computers in lets say the TSE the actual stock price or spot price of gold and how does he arrive at that price in practical technical terms. What numbers is he crunching, what actual data is he using to set the price and who is he that he is allowed to set the price?
Exactly. After their IPO it really is just supply and demand. Is it over valued or under valued. Sometimes its under valued and still sinks and sometimes its over valued and still goes up. There is no simple answer to what makes it move. But it isn't just a guy behind the computer changing the price to every stock every minute of every day. like some think thats what happens.
Dew Time it's not just a simple answer man. Clay did a good job generally explaining why stocks move up and down. People that supply and demand the stock decide what the price will be but, that is not what makes up the price. The company behind the stock and what they do makes up for the price of the stock and it's up to investors to determine whether it's a good deal or not.
That's a lot to take in. There are lots of reasons why stocks don't go up to infinite. News can be the leading factor in what causes the masses to sell off before they lose money (or more money on a stock). So fear will cause somebody to sell even if it isn't for a profit. A company can show loses on their quarterly report making the stock seem less valuable and that can cause a sell off and lower the price on stocks. There are so many reasons why stocks go up and down. There isn't a magic guy just setting the prices to all 14000 US Stocks. But it is still supply and demand at the root of it. If stocks were so simple and easy to understand everybody would be rich. Me included. It is so complex and I don't understand a lot of it, but I do understand that there isn't a guy setting the prices. Because you watch the Bid/Ask price all day long on stocks and the volume changes and the price changes minute by minute.
Shaun Sollie A stock is an asset like any other. Buying stock is the same as buying cars, houses and gold bars. The difference is that stock is an intangible asset, which means it doesn't have all the storage problems of cars and gold bars. But, like all assets, a stock's value can either go up or down. Stock trading essentially follows the "buy low, sell high" pattern. You say that the the market has always run based on supply and demand, where there will always be a demand to sell if the price is right, and there is almost always a demand to buy if the price is right. The question then becomes what exactly is the right price? It's easy for a prospective buyer to say that he wants to buy a certain stock for a certain price but it's a whole other story when the seller refuses the buyer's offer because it's too low. Naturally people will always want to sell something for the highest possible price and people are generally reluctant to buy something knowing that, in buying it, they are making a profit for the seller who previously bought the stock for a low price and is now selling it for a higher price and thus making a profit. Now repeat this a few times and the price of the stock should be going all the way up to infinity. Because someone will buy low and sell high, and the next will sell that for even higher and someone will buy it for higher, and in turn will sell it for much higher than what he previously paid for it, and so on to infinity. So why aren't stock prices much lower than what they should be? I'd be expecting stock prices only to in one direction and that's upwards because every person is trying to sell his stock for a higher price than the previous. Let me illustrate this with an example: you buy a stock today for $100. Tomorrow it goes up to $200. You sell it and reap a profit of $100. Tomorrow that stock you sold goes up to $300. Now the person you sold to (who knows how much the stock was worth when you originally bought it) sells it and reaps a profit of $200 ($300 - $100 = $200). Repeat these steps millions of times and see where this is going. Now, you reach a point where the next person will not buy your stock for anything higher than what you originally paid for it. And, as a result, you lower your price to the point where the person will agree to the right price. So now the stock goes down and you go back to square one and sell the stock for $100. Now the new owner of that stock must rely on market trends to see whether the stock will go up to $200 or $300 tomorrow. And this is a cyclical trend (stocks go up, peak, go down). Profits are continuously being made from the buying and selling of stock, and the companies under which these outstanding shares were issues can either pay dividends or use the money to re-invest in itself to expand its business and grow and become bigger companies and eventually be able to pay even bigger dividends (or choose to re-invest those). This is the strategy that Berkshire Hathaway uses. Their share price is about $192,000 but they don't pay dividends since they prefer using that money to re-invest in themselves and expand their business and eventually their share price will double or triple over the years and then you can decide whether to sell these shares or not. It's like buying $1,000 shares of Apple during its initial years. It might not have been worth much then but today it would be worth a lot.
I also want to know who is the guy who is typing all the prices of the stocks on the computers and if it's possible for this guy to type in a low number for a certain stock, then he personally buys that stock at that price, then the next day he increases the price of the stock to a high number, and then sells his stock for that high number and makes a huge profit.
Couldn't understand could you please elaborate bit more . When company not performing well, how does it directly affects the stock price. As per my understanding the stock price is decided between the buyer and seller and not by the company.
Hi Clay, I am getting training for certified investment banking course.
can you please suggest me and can you send me the links of your classes to get good knowledge and clear understanding of the lessons.
i have gone through your classes on youtube you explained very clearly can you please send me the links which required for certified investment banking course.
How does a company's profit affect the stock price? I don't understand. If there is a company increasing their profit very quickly couldn't the stock price actually go down if everyone wants to sell for some reason?
So who inputs the value of the price of stock into the computers, or is it all automated by an evil hal 9000? What man behind the curtain gives the order to change the value of the stock of an company, and have it input into a computer; the company itself or some mysterious troll who lives inside of the new york stock exhange eifice itself?
Dew Time On eBay you have iPhones selling for various prices and you naturally want to sell it for the highest possible price. So, let's say you got a brand new iPhone sealed in the box and want to sell it for, say, $1,300. No one wants to buy it. Now you reduce the price to $1,100. No one wants to buy it. Now you reduce it to $1,000 and someone sends you a message with an offer saying that he is willing to bid for $950 and thereafter you get another message from someone who will buy it for $900 so you negotiate with the latter and eventually accept this offer and sell your iPhone. So in this example, there's a demand (someone wants an iPhone and there's a supply of an iPhone). You reach a point of equilibrium where you come to agree with your prospective sellers on what price to sell for. In the iPhone example, the "opening" iPhone "stock price" was $1,300 and at the close of the day it went down to $900. Let's suppose that you refused to sell for this price and waited for the next day. Your opening offer would then be $900 (last bid was for). Stock exchanges essentially have all the pre-order/bid information in their databases (what buyers are willing to buy stock for as set on their stop limit orders with their brokers). Remember, when you want to buy a stock, you have an account where you can set various perimeters like "buy X stock when X stock goes down to $X" or "sell X stock when X stock rises to $X". The stock exchanges already have this information and it gets updated automatically on the TV screens and these are the figures you see every day and they fluctuate because different people are bidding against each other on what price they will accept/offer against each other. The stock exchange is one big auction house where people are constantly outbidding each other and, instead of an expensive painting or Patek Philippe watch, the product they are trying to buy are company shares. The difference is that, unlike an auction, in a stock exchange there is no one standing with a hammer to control offers because, rather, the buyers and sellers have those hammers because they each have their own invisible hammers. So one person is saying (or setting on his broker account that he has opened with a brokerage firm) that he wants to buy a stock for a certain price, and another person is saying he wants to sell that stock for a certain price.
Clay you never answer the question. What you’re saying would make perfect sense if we’re talking about eBay. But why is it that google stock closed at a set price vs on eBay you have multiple different prices for an iPhone X for example.
Yes you've explained how, but his question is same as mine. Who? is there a Department in a company that focuses on numbers of stocks traded? the CFO? the Board Members of each company or the people working in Security exchanges?
The question might be stupid but i dont know, im new to this.
Hi Clay. Quick question regarding this topic. When you decide to buy or sell a stock, who do you buy it from or sell it to? Are all stock transactions made just to the company that is offering the stock? It might be a dumb question, but I thought I would ask anyways. Thanks a ton for the videos, I love the content and keep up the good work.
I understand the concept of the video. With that news of pepperoni being good a lot of people will buy the company's share thinking the company will be profitable in the future. So, it's like buying through your fundamental analysis of the company. But share price can still go up because of increased volume of people buying the stocks regardless of the company's performance. Is that right?
Hey Clay, I love your vidoes been watching 2 or 3 per day, Learning a lot from you. do you have any information on what it means when the stock market opens and closes and why is there determined time?. Does that mean that is the only time you can trade at those specific hours when the market open and closes? What is after hours in the stock Market? Thanks
another reason are market makers..... market makers are the real reason on how a stock price is determined. An individual investor or company who has the most money to regulate said stock price through shares of a particular stock, which can also be correlated with support and resistance. of course once heavy volume comes in and the demand is great, the price will shoot through the resistance and up the price even more, which is what your video is explaining...... yeah, its hard for me to simplify what im thinking in my head. you make explaining things a lot easier than i can, thats why your the one making the videos lol
ClayTrader that's really what I wanted to say I just tried to be a little more subtle. It is truly becoming a thing of the past... Their purpose is not to provide support and resistance. The true "market makers" were specialists who actually did supply liquidity. The trade off for them providing liquidity in bad times was that they always saw the order book and knew who was trading what.
The market maker thing on penny stocks is a sham. It's a dumb excuse that pumpers use to cast the blame on others to hide the fact that THEY are the ones dumping their shares. I have an entire course on this stuff - https://claytrader.com/courses/the-penny-stock-survival-guide/
John Manuel not so much for very liquid stocks but in an OTC market, yes. Most trades are done over ECN'S if the stock is exchange traded, and market makers are playing smaller roles. You see more MM's in the OTC/options markets. I think a lot of the information online is outdated on this topic, so I hope this provides some insight.
Hey Clay ,while determining the value of the stock as in to buy or to sell do we have to look at the intrinsic value of the stock and the opportunity cost of holding the stock or the notional value of the stock ie the inflation bearing value of the stock. Logically it may present a trigger situation wherein people albeit unsuccessfully try to time the market and loose.Watching your videos doing live trade gives me a sense of directional trading which is clutter free and rational,away from top heavy concept.Thanks for selfless knowledge empowerment absolutely brilliant
So whether the company is doing good or bad is independent of whether the stock value goes up or down right? Because if the company is doing bad but everyone is still buying shares, on the chart it is going to show that the stock value is moving upwards. And if the company is doing great but everyone is selling shares, the chart will show them going down, correct?
"bad" and "good" are subjective. I mean you could look at something and think its "good", but if people want to "give", and therefore prices go down, then according to the only thing that matters, price action, it is actually "bad". Here's another way to look at it - https://claytrader.com/videos/suck-guessing-heres-solution/
Hey Clay, I've been paper trading faithfully for 3 months now and I've been getting a feel/understanding using TA w/ a lil' Fundamentals also mastering the platform I'm using (TOS). What I don't understand is, when I'm in a Long Position and it's not going in my favor and want to get out quick (because price is dropping fast). I would place a Market Order to get out and what I Notice is that sometimes I would market out with Profits and sometimes not. What would determine that market price to be in my favor?
Uploading contracts to an online database should not take too long, and with the right solution, there should be a way to quickly drag and drop them into folders. Of course, the contract management team may want to give some thought as to how those folders are categorized. In some industries, it may make sense to classify them by agreement type, whereas in others they may need to be grouped by timeframe or date. It is obviously important to do what makes sense for your company and to ensure everyone understands the classification system that is instituted. With this sort of well-oiled system in place, it is a lot easier to keep a handle on things.
Divide and Conquer.
This is another area that is very industry-dependent, but it is highly unlikely that any company can afford to have an entire contract team devoted to managing one portfolio. More than likely, it is more realistic to divvy up the team and the contracts so that there is a leader for each relevant sphere. The entire team will obviously have to coordinate and communicate, but resources must be allocated in the most efficient manner possible. In turn, this will allow for several individuals to keep an eye on a smaller batch of contracts, thereby facilitating those periodic reviews.
Outsource the Tedium to Technology.