How a Company’s Stock Price and Market Capitalization is Determined

When you check the business section in most dailies, you come across news on the stock market. You run your finger down the pages checking the share prices and wonder how a company’s worth is arrived at. Or maybe you don’t, but a light bulb just went on in your head, didn’t it?

A company’s worth, better known in financial circles as market capitalization, comes from the stock price multiplied by the number of shares outstanding. A company can have pricey shares but fewer shares outstanding. This company may be valued less than a company that has cheaper shares but more shares outstanding. Stock trade platforms like live share price for Lloyds and others are great for checking share prices.

The share price therefore points to how much the company is worth and it represents only a percentage change. This is why investors are concerned about percentage changes.

Why set stock prices?

  • When a company goes public, an IPO (Initial Public Offering) is held and the stock price is calculated.
  • The company engages an investment bank to do this.
  • Formulas and valuation techniques are used to arbitrate how many shares will be released to the public and at what price.
  • Once a company gets on the stock exchange, the share price depends on supply and demand. A high demand boosts the price while low demand decreases the same.
  • A company’s potential growth is important when it gets on the stock market. If it does not look assuring, sellers will drive the share price.

Supply and DemandDetermine Share Prices

In business, supply and demand determine the pricing of products. If the demand is high, the price is pushed up. When it is low, people are not very interested in the product, the price nosedives. The same applies to the stock market.

  • A company with potential to grow and make huge profits attracts more investors.
  • A company that can barely stay above water will attract very few investors if any. It is more likely to attract a bevvy of buyers keen on turning it around.
  • The company that attracts more investors is in high demand. Its prices are likely to go up.
  • The one that has the potential to attract more sellers than buyers is in low demand investment wise. The share price for this one can go down to an all-time low.
  • The in-demand company is on an uptrend, which puts it in the bull market
  • The low demand one is on a downtrend, which puts it in the bear market

There are two types of IPOs:

  • Fixed price
  • Book building

A company is at liberty to use either or both. When you participate in an IPO as an investor, you have the advantage of being able to buy shares before they are made available to the general public.

Armed with information about what to take into consideration when thinking about a foray into the stocks market, it gets easier to make informed decisions especially if you check sites like live share price for Lloyds and other companies to find out which are on the market and their share prices.


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