How, exactly, is a share price decided or dictated?
February 8, 2011 3:27 PM   Subscribe

Explain to me the stock markets...

I know that (for example) Steve Jobs taking medical leave is potentially bad news for Apple hence their share price will go down, but how exactly is it decided what the share price of a company is, and how much it goes up or down in response to certain news? What I'm trying to understand is... why does a share price go up or down by a specific amount? Who decides this? What is the process exactly by which share prices fluctuate. I have these ideas of a big brain in a jar deciding how much a certain news item will influence a share price and need a clear and simple answer. Hope me!
posted by dougrayrankin to Work & Money (17 answers total) 6 users marked this as a favorite
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posted by msbutah at 3:35 PM on February 8, 2011

FWIW, Apple's share price has gone UP since Jobs announced his medical leave. It's now at $355/sh making its market cap $327 billion dollars, the second most valued company after Exxon/Mobil
posted by buckaroo_benzai at 3:35 PM on February 8, 2011

Ideally, the current share price is the exact price at the demand by buyers of the stock and supply by sellers of the stock meet. It is kind of like when you sell your car and the price ends up being the amount you are willing to let it go for, but also the amount someone else is willing to pay. That convergence of buyers and sellers happens over and over again for a company's stock, and so the price fluctuates
posted by found missing at 3:38 PM on February 8, 2011

You've asked a very big question. Resources are out there with basic information. But just remember one thing:

how exactly is it decided what the share price of a company is

Everything is determined by how much people want to buy it. If lots of people want to buy it, the price goes up. If no one wants to buy it, the price goes down.

Steve Job leaves = uncertainty about Apple's future = "I better not buy this, it's too risky" = price goes down.

It's more complex than that (e.g. people buying on the dip), but that's the basic idea.
posted by Cool Papa Bell at 3:40 PM on February 8, 2011

What people are willing to pay for a share of stock is based on the present value of the companies expected future earnings. Of course the future is unknowable and everyone predicts future earnings differently but there are thousands of accountants and financial experts who try to do this accurately.

When news hits like Steve Jobs is taking a leave of absence, many people assume that without him Apple's future earnings will be less and therefore the share price should be lower. They then keep selling shares until the price reaches a more appropriate value based on their revised estimates for future earnings.
posted by Durin's Bane at 3:42 PM on February 8, 2011 [1 favorite]

Found missing, thanks for your answer but what I'm trying to get at is that when I check te stock price for a company, there's one price. Not a range of prices that various people would be happy to pay. I want to know who or what is te authority that decides that one price.
posted by dougrayrankin at 3:42 PM on February 8, 2011

Oh, you're just looking at the most recent trade.
posted by found missing at 3:43 PM on February 8, 2011

Is it really as simple as that? The price I see for a company's stock on Yahoo Finance for example is the most recently traded price? That does make a lot of sense.
posted by dougrayrankin at 3:45 PM on February 8, 2011

So, the stock price is a factual record of the prices that past buyers and sellers have agreed on. The current price is simply the latest update on that historical trading record.
posted by found missing at 3:45 PM on February 8, 2011 [1 favorite]

If you were a professional trader you would be able to see a spread of bids, short positions, all sorts of information the average joe doesn't see.
posted by GuyZero at 3:46 PM on February 8, 2011

If you look at this quote for AAPL, for example, there are two values in addition to the "last trade" value: "bid" and "ask," which are the offers to buy or sell the stock. So if you were to buy or sell now at the market price, it's the bid/ask that's important, rather than the price of the last trade.
posted by blue mustard at 3:56 PM on February 8, 2011

At any given time there is a bid/ask spread for a stock - the bid is what buyers are offering, the ask is what sellers will sell for. As found missing says, the "price" you're seeing is the last trade.

For stocks like Apple, or other big companies, the spread will be very narrow, and there will be lots of volume (completed trades). For smaller companies, the spreads tend to be larger with less trading.

But more fundamentally, the price that a stock trades for is a function of a variety of things, including news, and the immediate interpretation of that news (like Jobs being sick), technical analysis of the stock chart and "momentum" based on buying/selling patterns, and fundamental analysis, probably the most important of the three, and what generally sets the longer-term range of the stock. A fundamental analysis of a company attempts to determine how much it's worth by examining (simplistically, in a variety of different ways) the amount of anticipated cash generation, discounted to the present day. So if the market believes that Apple will generate $20bn a year in cash for the next 10 years, growing 10% a year, you add that all up, discount to account for inflation, divide by the number of shares outstanding, and you have your theoretical share price. Or about $350/share, give or take. So if the market believes that Jobs not being in charge at Apple will reduce the amount of cash Apple generates in the future, the per-share value of the company will go down.
posted by loquax at 3:56 PM on February 8, 2011

It depends on where the stock is traded.

On the NYSE, there is a guy in the middle, called "the specialist" who stands ready to buy and sell a given stock (called the bid and the ask) at a given price. At the end of the day he wants to go home holding relatively little stock - there's a lot of overnight volatility due to announcements and such - so he tries to balance the buy and sell pressure. If there's a lot of people buying the stock, he raises the price, etc.

On the NASDAQ, things are more complicated. NASDAQ was essentially a quote system, and several people (called "market makers") could publish a bid and an ask to the system, which everyone would see. You'd then call them directly to actually make the trade. The situation has become more complicated as electronic trading systems, called ECNs, allowed you to send them limit orders, which sat around until they were matched with the opposite side limit order. A limit order is an offer to buy or sell a given quantity of shares at a given price.

After people trade, they report their prices to the exchanges, which publish that price as the last trade price. So the stock "price" is typically the last trade price, but you could also look at the last bid/ask.

GuyZero - you can't see other people's short positions.
posted by joshu at 4:01 PM on February 8, 2011 [1 favorite]

But people have some idea of the volume of short positions, right? You see it come up in news from time to time and I always wondered how people knew data about shorts. (sorry for hijacking here)
posted by GuyZero at 4:04 PM on February 8, 2011

You may be interested in Ascent of Money (click watch now, then full episode: Blowing Bubbles) - a TV series that nicely explains this sort of stuff.

video may not work outside Canada ...
posted by doublesix at 4:10 PM on February 8, 2011

Durin Bane describe's how it's supposed to theoretically work. Then as a person interested in making money, you could calculate what you believe the present value of the expected future earnings of a company are, and compare it to the current stock price and use that to decide whether the stock price is overvalued or undervalued.

But the market doesn't always act the way it's supposed to theoretically work -- if it did their would be much less day to day fluctuations of a given stocks price.
posted by garlic at 4:14 PM on February 8, 2011

But people have some idea of the volume of short positions, right? You see it come up in news from time to time and I always wondered how people knew data about shorts. (sorry for hijacking here)

Yes, short interest and short volumes are available market data from exchanges and data providers. I think you can even see some subset of data on yahoo/google finance (like here, for MSFT under share statistics). You won't be able to see an individual's short position, but you can see overall short interest.

And sorry Durin Bane, didn't see your links to PV, didn't mean to repeat you earlier.
posted by loquax at 5:34 PM on February 8, 2011

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