How is Share Price Calculated? Let’s find out!
How is share price calculated?
Hi friends! Angel Broking ke is podcast mein aapka swagat hai.
Doston stock exchanges par har din billions of transactions hote hain, jinme un exchanges par listed companies ke shares ki intense trading hoti hai.
Aise hi ek din main aur Shikha apni company ke shares ki prices ko closely follow kar rahe the. Aur COVID ke baad economic recovery ka pehla phase tha - remember, us samay par tech aur pharmaceutical stocks significantly rise kar rahe the? Hum logon ne bhi apni savings ko ek technology sector ke mutual funds mein invest kar rakha tha. Usme ek company ne do din ke andar kaafi gain kiya. And we were checking out this stock as it was gaining over the two days in the market. Is stock ki prices ko har do seconds mein change hote hue dekhkar Shikha ne poocha, ki how are these prices calculated so fast, every other second?
And then I told her everything about the calculation of stock prices - from start to finish! Aur ab main aapko bhi yahi baat batane jaa rahi hun! Because I’m pretty sure ki aapke mann mein bhi ye sawaal kabhi na kabhi zaroor aaya hoga. Am I right?
Toh chaliye dekhte hain, ki shares ki prices kaise calculate ki jaati hain.
Doston the very first time when share prices are calculated, is when a company goes public. Yani ki, jab woh stock market trade hona shuru hoti hai. Is samay par, company ke share prices ko pehli baar calculate kiye jaane se pehle company ka valuation kiya jata hai.
Ab valuation might look like a big word, but it really isn’t that complicated.
Valuation ka simple matlab hota hai ki ek company ki value kya hai. Ye value company ke sabhi assets, liabilities, earnings, aur existing patents jaise factors se determine hoti hai. Assets include real estate, operational equipment, computers, furniture, commodities etc. Liabilities mein company ke pending debts jaise ki loans include hote hain. Valuation hone ke baad company issue size decide karti hai - yani ki number of shares jo ki IPO mein offer kiye jayenge. Valuation ko isse divide karke shares ki offer price determine hoti hai. And this, my friends, is the method which determines the price of a company’s share for the first time when it enters the stock market.
Lekin fir kya? How is the share price calculated after this? This is where classic economic principles come to our help. Kya aapne supply aur demand ke principle ke baare mein suna hai?
Is principle ke according, agar kisi cheez ki demand market mein badhti hai - yani ki kai log isko khareedna chahte hain, toh is cheez ki price badhegi. Lekin agar kisi cheez ki demand ghatti hai, toh its price also decreases.
Stock market mein kisi share ki price ke calculation mein kuch yahi principle prices ko lagatar fluctuate karta hai. Now guess ki stock exchanges supply aur demand ko precisely measure kaise karte honge?
And the answer is, with the buy and sell orders that it gets every few minutes. Ji haan, stock exchanges par thousands of buy aur sell orders post kiye jaate hain every single second. Agar aap kisi share ki ask aur bid spread ka graph dekhoge, toh you will realize ki stock exchanges basically supply ko demand se match karne ka kaam karte hain. Is process mein shares ki prices continuously buy aur sell orders se determine hone wali demand ko respond karti rehti hain. In fact, this is exactly what drives prices up and down every other second when the markets open, and until they close!
Iske alawa, there are secondary factors also that affect stock prices. Lekin ye factors usually demand aur supply ko affect karte hain. For example, agar kisi company ke assets koi flood ya fir hurricane jaise natural disasters se affect hote hain, toh us company ko losses hone ke kaaran people start selling their shares. Suddenly, uss stock ki demand girne ke kaaran, aur supply badhne ke kaaran uski price reduce ho jaati hai. Similarly, annual reports mein achcha performance dekhkar kisi stock ki demand badh jaati hai - this results in an increase in its price. But ye factors usually stock ki prices ke calculation ko affect nahi karte.
Lekin one thing does. Agar koi company stock split karti hai, toh uske ek stock ko do se lekar teen, chaar ya fir even 20 or 30 stocks mein convert kiya jaa sakta hai. Iss case mein the stocks held by investors retain their value, lekin inka number split ratio se multiply ho jaata hai. Saath hi, stock ki price is split ratio se divide ho jaati hai - toh agar ek stock do mein convert hua, then uski price will become half. Similarly, 1 is to 10 stock split mein ek share ki price ten times reduce ho jayegi.
Stock price calculation looks simple, haina? Lekin the systems that are consistently adjusting the stock prices are incredibly complicated. Ye systems extremely high frequencies par orders ko scan aur match karte hain. When the markets open, this is what goes on behind the scenes! Tha na ye interesting concept? Want to learn about more cool stock market concepts? Toh stay tuned to our podcasts, or visit www.angelbroking.com for free learning material!
Until then, goodbye from Angel Broking, and happy learning!
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