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I have been trying to find exact information on how stock prices are determined but still I haven't found any exact mathematical formulas how it happens. Wikipedia states:

When prospective buyers outnumber sellers, the price rises. Eventually, sellers attracted to the high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers leave, again achieving equilibrium.

That still doesn't tell how the price is determined. The formulas must exist, because prices can be followed real time? I'll give a simple example. Let's consider that there is a Company X and parties A, B and C and there exists 6000 stocks in public market.

At moment 1

Current stock price: 100€

Stocks held:

Party A: 2000 stocks -> value = 2000*100€ = 200 000€
Party B: 3000 stocks -> value = 3000*100€ = 300 000€
Party C: 1000 stocks -> value = 1000*100€ = 100 000€

At moment 2

Party C wants to by 1000 stocks at price 110€ and Party B wants to sell 1000 stocks at price 120€. How is the correct price in the middle determined exactly? Is it just by negotiating or is there a formula to determine it?

In any case, let's then consider that the agreement is in the middle and agreed price is 115€ and transaction is made.

The most important question is: What is the the global stock price after such transaction?

At moment 3

Current stock price: NEW_STOCK_PRICE

Stocks held:

Party A: 2000 stocks -> value = 2000*NEW_STOCK_PRICE = ?
Party B: 2000 stocks -> value = 2000*NEW_STOCK_PRICE = ?
Party C: 2000 stocks -> value = 2000*NEW_STOCK_PRICE = ?

How is the NEW_STOCK_PRICE calculated and what is its value?

For instance in Yahoo Finance (during writing this) Microsoft is valued for 30.56. Where does that number come from?

Chris W. Rea
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M.L.
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4 Answers4

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A stock market is just that, a market place where buyers and sellers come together to buy and sell shares in companies listed on that stock market. There is no global stock price, the price relates to the last price a stock was traded at on a particular stock market. However, a company can be listed on more than one stock exchange. For example, some Australian companies are listed both on the Australian Stock Exchange (ASX) and the NYSE, and they usually trade at different prices on the different exchanges.

Also, there is no formula to determine a stock price. In your example where C wants to buy at 110 and B wants to sell at 120, there will be no sale until one or both of them decides to change their bid or offer to match the opposite, or until new buyers and/or sellers come into the market closing the gap between the buy and sell prices and creating more liquidity. It is all to do with supply and demand and peoples' emotions.

Victor
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The fallacy in your question is in this statement:

"The formulas must exist, because prices can be followed real time."

What you see are snapshots of the current status of the stock, what was the last price a stock was traded at, what is the volume, is the price going up or down.

People who buy and hold their stock look at the status every few days or even every few months. Day traders look at the status every second of the trading day.

The math/formula comes in when people try to predict where the stock is going based on the squiggles in the line. These squiggles move based on how other people react to the squiggles.

The big movements occur when big pieces of news make large movements in the price. Company X announces the release of the key product will be delayed by a year; the founder is stepping down; the government just doubled the order for a new weapon system; the insiders are selling all the shares they can.

There are no formulas to determine the correct price, only formulas that try to predict where the price may go.

Chris W. Rea
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mhoran_psprep
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I found the answer. It was the Stock Ticker that I was looking for. So, if I understand correctly the price at certain moment is the price of the latest sale and can be used to get a global picture of what certain stock is worth at that certain instant.

M.L.
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Try to find the P/E ratio of the Company and then Multiply it with last E.P.S, this calculation gives the Fundamental Value of the share, anything higher than this Value is not acceptable and Vice versa.

user11869
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