What Determine The Share Price Of A Stock?

Before a private company goes public, it will go through a process known as Initial Public Offering (IPO). Where the share price of the stock will be determined by the business owner depending on the amount of money it wish to raise. Once the stock is listed on the stock market exchange, investor will be able to start buying and selling the stock, it is through the activity of buying and selling that affect the subsequent price of the stock.

How Does Buying And Selling Affect The Stock Price?

The process is known as Bid – Ask Spread. For example:
If Investor ABC already own one share of a stock, and he is selling it $21, this is the ask price.

On the other hand, Investor XYZ wanted to buy one share of the stock and he is only willing to pay $20, this is the bid price.

If Investor XYZ wanted to buy the stock badly and he wishes to close the deal at $21, he will then have to adjust his order and close the deal by submitting a bid at $21.

Once the deal is closed, Investor XYZ will want to sell the stock at a asking price of $22 to make a $1 dollar profit. Now the value of the share price is increased by $1 should other investor is willing to close the deal by submitting a bid at $22.

How Does The Supply And Demand Of The Stock Affect The Share Price?

Continue the above example,

Let’s say now the asking price by Investor XYZ is $22. Suddenly, Investor ABC who previously own 10 shares of the stock, submit an ask price of $19. Now in the market there are extra 10 shares of the stock which worth $19, $3 dollar cheaper than the 1 share offer by Investor XYZ.

Other investor who are willing to close the deal, submit a bid at $19 and close the deal. Now the value of the stock has plunged by $3. Investor XYZ is now suffering a paper loss. He can either hold on to the stock until the price bounce back, or he can sell it for an actual loss if he thinks the ask price is getting lower and lower for whatever reason.

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