Share price definition

What is a share price?

A share price – or a stock price – is the amount it would cost to buy one share in a company. The price of a share is not fixed, but fluctuates according to market conditions. It will likely increase if the company is perceived to be doing well, or fall if the company isn’t meeting expectations.

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How are share prices determined?

Initially, share prices are determined through a company’s initial public offering (IPO), in which the price of one share is set according to the perceived supply of, and demand for, that company’s stock. The prices are usually set by a bookrunner – a lead manager who is appointed specifically to help the company determine an appropriate price for its IPO.

After the IPO, a company’s share price can be impacted by a range of factors. For example, any increase in the number of shares on the market would bring the price down, assuming demand remains the same. Equally, any reduction in demand – perhaps on the back of changes in a company’s senior leadership – would reduce the share price, so long as supply remains constant.

More specifically, other factors can also affect a company’s share price include expected or unexpected industry news, macroeconomic data releases and political announcements.

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How to analyse share prices

Share prices can be effectively analysed through both technical and fundamental analysis. Technical analysis seeks to assess the future price movements of shares by looking at historical chart data. By studying previous share price trends, technical analysts can often identify whether a stock is about to enter a bullish or bearish trend.

Fundamental analysis is more concerned with identifying whether a stock is over or undervalued. It does this by analysing the individual company’s perceived ability to generate a profit, focusing on macroeconomic data, financial statements and decisions from senior management.

Why do companies want their share prices to rise?

There are a number of reasons that companies want their share prices to rise. For example, a high stock price brings with it a certain amount of prestige and can discourage takeovers. And as well as being able to generate large amounts of revenue for the company, it can also mean that senior management – or employees in general – might get a bonus at certain points in the year.

One way a company can encourage share price growth, is by paying dividends to its shareholders as a reward for their investment. Dividends not only attract new investors, which will increase demand and drive the share price up, but encourage current shareholders to keep their shares rather than selling them. This is good for the company, because selloffs can cause the price of a share to fall as the market adjusts to the increased supply.

If a company ever wants its share price to fall – perhaps to make their shares more accessible to investors – then it can issue a stock split. Stock splits will reduce the price of a company’s stock by increasing the supply of shares available on the market. For example, if a company issues a two-for-one stock split, the total number of shares will double, which means that the price of each share will halve.

However, stock splits do not mean that the company’s market capitalisation will fall, because the reduction in the price of the stock is proportionate to the amount of new stock that has been issued.

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