Everyone knows what a stock price is. But how are stock prices determined? For example, why does one company trade at $50 a share while another trades at $10 a share?
A stock price is just the price at which the latest transaction occurred. In other words, the last time someone bought or sold the stock, that’s the price it was transacted at.
Buying and selling is based on supply and demand in the market. If more investors want a piece of a stock, the demand for that company goes up. With that, the stock price also rises. On the other hand, if more investors are selling the stock than buying it (maybe they don't think the company is going to do well going forward), the stock price falls.
Companies sometimes buy back their own stock, in an attempt to reduce the number of available shares that investors can purchase. This can increase demand for the stock and also raise the stock price.
Supply and demand is the main driver of stock prices, but there are other factors that play a role as well. These include:
- Earnings trends for the company
- Activity by institutional investors
- Market conditions
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