A share price is the price at which the last buyer and the last seller agreed to exchange one share of a company. That is all it is. It is not the company's value, it is not what the company is "worth", and it is not a promise about where the price goes next. It is simply the most recent trade, shown on a screen.
Understanding that one idea clears up most of the confusion beginners have about stocks. A company does not set its own share price. The market does, one trade at a time.
Who sets the price
Every listed share has two sides to every trade. Buyers place bids, which are the most they will pay. Sellers place offers, which are the least they will accept. When a bid and an offer meet, a trade happens and that trade becomes the new last price.
The best bid (the highest price anyone will pay right now) and the best offer (the lowest price anyone will sell at) sit next to each other. The gap between them is called the bid-ask spread, and it is one of the main signs of how easily a stock can be bought and sold. Heavily traded large companies usually have a tiny spread. Thinly traded small companies can have a wide one.
Because the price is the result of many people's decisions, it reflects what the buyers and sellers in the market expect, at that moment, about the company's future profits, its risks and the wider economy. That is why prices can move on news, on rumours, and on nothing much at all.
What moves a share price
Four things move most share prices.
- Company news. Results, profit warnings, new contracts, a change of boss, a lawsuit. Results matter most, because they change the profits the market expects.
- Expectations. A company can beat its profit figure and still see its shares fall, if the market was hoping for a bigger beat. The price tracks expectations, not just the outcome.
- The wider market. Most shares rise and fall with the market or their index on a given day. A good company can drop on a bad day for everyone.
- Supply and demand for the stock itself. Large sellers or buyers, index changes, and a shortage of shares for sale can push a price around without any change in the company's business.
A price that moves a lot in a day is volatile. A price that barely moves is stable, or illiquid. Neither word says whether the stock is a good buy.
What the price does not tell you
This is the part most beginners miss. A high share price does not mean a company is expensive, and a low share price does not mean it is cheap. A company with a share price of 2 can be far more expensive than one trading at 200, depending on how many shares it has and how much profit it earns.
Consider two companies. Company A has a share price of 10 and 1 million shares, so its market value is 10 million. Company B has a share price of 200 and 10 million shares, so its market value is 2 billion. A rise of 1 in Company A's price is a 10 percent move. A rise of 1 in Company B's price is 0.5 percent. The number on the screen tells you nothing about size until you know the share count.
That is why traders look at market capitalization (price times shares outstanding) and at ratios such as the price-to-earnings ratio, not at the price alone. See the guide on market capitalization for the details.
A worked example
Suppose a company's shares closed at 50.00 on Monday and at 52.50 on Tuesday. The price rose 2.50, which is a gain of 5 percent (2.50 divided by 50.00).
If you had bought 100 shares on Monday at 50.00, your position cost 5,000. On Tuesday it was worth 5,250. Your gain on paper is 250. You have made nothing until you sell, and you pay costs when you buy and sell, which reduce that gain.
Now suppose the price falls to 47.50 on Wednesday. The position is worth 4,750, which is 250 less than the 5,000 you paid. The price fell 5.00 from Tuesday, a drop of about 9.5 percent from that day's value. That drop wiped out the 5 percent gain from Tuesday and then took the position below where it started. Percentage moves are not symmetrical. A 10 percent fall needs an 11.1 percent rise just to get back to where it started, and a 50 percent fall needs a 100 percent rise.
| Day | Price | Position value (100 shares) | Gain or loss on 5,000 cost |
|---|---|---|---|
| Monday | 50.00 | 5,000 | 0 |
| Tuesday | 52.50 | 5,250 | +250 |
| Wednesday | 47.50 | 4,750 | −250 |
The table shows the main point: prices move in both directions, and a position's value follows the price exactly, before any costs.
Share prices in different markets
Every market has its own currency and its own rules about price steps. A share in India is quoted in rupees, a share in Nepal in Nepalese rupees, a share in the United States in dollars. Some exchanges set a daily price limit, so a share cannot move more than a set amount in one session. Others have no such limit. Check the rules of the market you trade in before you rely on a price move, because the limit decides whether a stock can recover in one day.
If you hold shares in another currency, the price you see is in that currency. Your return also depends on the exchange rate between that currency and your own. A stock can rise in its own currency and still lose money for you if the currency falls. This is covered in the guide on currency risk for foreign stocks.
How to use the price well
- Look at the price history, not one number. A single price is a snapshot. A chart over weeks or months shows whether the price is trending, sideways or erratic. The guide on reading a stock chart shows how to do this.
- Check the volume. A price move on heavy trading means more people agree with it than a move on light trading. See the guide on trading volume.
- Compare like with like. Compare a company's price with its own history, its peers and its index, not with a random other stock.
- Know the dates. Results, dividend dates and index changes often move prices. A price can jump on a date you already knew about.
- Use the price to measure risk, not to predict. A price tells you what you would pay and what you would receive if you sold now. It does not tell you the future.
Common mistakes
Beginners often buy because a price is "low" compared with its past high. A stock that fell 80 percent may still fall another 80 percent, and a stock that has already risen a lot may keep rising. The past price is information, not a target.
Another mistake is treating a rising price as proof that the market is right about a company. Prices can rise on hype and fall on fear for months. The price is the market's current opinion, and that opinion can be wrong.
The third mistake is ignoring costs. Brokers, exchange fees and taxes can take a meaningful share of a small gain, so a trade can show a profit on the screen and still lose money overall.
Key takeaways
A share price is the last agreed price for one share. It is set by buyers and sellers, it reflects expectations, and it moves for reasons that are often unrelated to the company's day-to-day business. On its own it says nothing about whether a company is cheap or expensive. For that you need the share count, the profits, and the context of the market and the company's history.
Read the price as one fact among several. Check the chart, the volume, the market it trades in and the date of the next major news event. Then decide.
This guide is for general information, not financial advice. See the disclaimer.