How are the price of stocks established?

Question

I am totally a fish out of water in this area. However I feel I should get a better grasp.

Answer 1

The market actually drives the stock price. The value of any asset is the Present Value calculation of all expected Future cash flows. The Gordon Growth model is often used in valuing stocks - it looks at the next expected dividend to be paid in conjunction with any growth expected over a certain number of years. Then it takes into consideration the particular investor's required rate of return given the riskiness or volatility of that particular stock. In general though, it is public sentiment that changes a stock price. For example, given the current economy, analysts (and accordingly the general public) believe that retail is going to have a hard time over the next year. (Gas is up, so people have less to spend on clothes for a broad example). Accordingly, a lot of retailers are way down right now. There are different efficient market theories on this- strong, semi-strong, and weak. It all has to do with how different economists believe stock prices adjust, and when. Obviously no one has the exact right answer or there wouldn't be so many schools of thought on it!

Answer 2

Supply and demand.  How many people want to buy or sell. How many shares are available.

Answer 3

depending demand

Answer 4

Let's keep it simple:

The value of any good or service is simply what a buyer is willing to pay for it.  That holds true with stocks too.  The "market" is simply all the people who own or may want to own a stock.  If man A thinks the value of stock in company XYZ is $45 a share and wants to sell his shares, and man B thinks the value of it is $30, they will not buy or sell from each other.  But there are a lot of people out there, and so someone out there is going to think it is worth $45, and man A's shares will be bought, if there are no shares for sale at a cheaper price.  People will always buy the stock for the cheapest they can get it, and try to sell it for as much as they can.  Hence we find temporary "equilibriums" which move around constatntly, but is effectively the current stock price.