There are several factors that influence stock price, depending on whether one is talking about valuation at the time of an initial public offering or ongoing price fluctuations on the secondary market. Stock prices are dependent on the value of a company, current economic conditions, and willingness on the part of investors to pay. As many people who follow the market are aware, stock prices can be extremely volatile.
At an initial public offering, a company decides to start selling shares in itself to members of the public. A detailed analysis is done to determine the company's market capitalization, how much the company is worth. This is divided by the number of shares that will be offered to determine the price for each share. Usually, an underwriter purchases the stock and then sells it on the open market. Almost immediately, investor demand starts to play a role in the stock price. Investment banks can decide to sell an initial public offering at a premium, demanding more than the estimated share value, if there is a lot of interest in the stock.
Once on the secondary market where investors buy and sell from each other, there are a lot of things that can come into play when it comes to pricing stocks. One is the fortunes of a company. Companies that are making money, declaring record earnings, and offering dividends on their stocks will have stock of a higher value. If a company appears in trouble, as might be the case when products have to be pulled from the market and when earnings drop, the stock price will fall.
Supply and demand are also important. If demand is high, with many people looking to buy stock, the stock price will be higher because sellers can afford to be choosy. When there is a glut of supply, on the other hand, the stock price tends to drop because buyers can pick and choose from the lowest prices they are offered. Some companies attempt to control supply and demand by recalling stock to reduce the amount floating on the market, thereby keeping supplies limited and promoting a higher stock price.
Stock fluctuations can also occur in response to general economic or industry trends. When the economy is depressed, stock prices drop. Likewise, companies in industries that are struggling will often have lower stock values. Investors look at a wide variety of factors when determining how much they want to pay for stocks, and ultimately, stock prices are predicated by how much investors think a given stock is worth.
