How To Calculate Share Price? What Factors Affect A Stock's Valuation?

What is the Meaning of Stock Price?

There is a very famous quote by George Bernard Shah where he says a cynic is a person who knows the price of everything but comprehends the value of nothing. Any individual can say this quote, but it is painstakingly important for investing their money in the stock market. Stock market investment is one way to make passive income, but to do so, there are a few things that one must know about, and the most important of them is calculating your investments' stock value. 

Today, with this article's help, we aim to provide readers with a basic understanding of how to calculate stock values and their importance. Furthermore, we are also discussing the importance of investing in stocks and how it should be done, so let’s begin. 

Factors Affecting Stock Prices

There could be many reasons for a stock value to rise and go down. But there are some crucial factors that influence the share price. 

Demand & Supply 

Demand and supply is the oldest economic principle, and these two are responsible for driving the price of most stocks. When the demand for a particular stock exceeds its supply, that means the number of buyers is more than the number of sellers in the stock market. This leads to a rise in the price of a stock. In addition to this, it also shows people are more willing to purchase this stock at a higher value. The opposite of it is also true when there is an abundance of stock and demand is low. In that case, the price of the stock is going to be lower. 

Fundamental Factors 

The financials of a company whose stock you have purchased are called fundamentals. The financial performance of a company is one of the most critical factors that decide how the stock value is going to be. Investors are more likely to overlook those companies with weaker financial performance, which leads to a downward spiral of the stock price. 

Economy 

Some investors don’t think about the influence of the economy on the share market when making predictions about the price movement of their shares. The state in which a country’s economy is present, along with the global economy, also plays a huge part in influencing the stock value. With the slowdown of the country’s economy, you will find out that stock value will also go down, which ultimately restricts FIIs from investing further. 

Government Policies 

Sometimes new government policies could shake the whole stock market and cause a change in stock values as well. On the other hand, if the policies which are announced by the government of the country are in favor of a specific industry. In that case, we get to see an immense increase in the stock value of that industry. However, in most cases, government policies are unfavorable to the market. 

Dividend Declarations 

This seems to be a minor factor in deciding the stock value, but nevertheless, it is the important one for the Indian share market. The value of stocks rises over time when a company declares its dividend. This is because companies that declare their dividends are perceived as good to invest in by people. At the same time, if the dividend declaration is not met the expectations of the investors, in that case, the stock value of that company can go down. 

How To Calculate Stock Price?

There are multiple things that influence the stock value; the most important and globally used method to evaluate the stock value is by using the metric P/E, which is Price-to-Earning. The P/E ratio comes out by dividing the company’s stock price by the most recently updated Earning Per Share (EPS). Let’s take an example to explain the working of the P/E ratio. 

Let’s look at the P/E ratio of Reliance Industries. The PE ratio of Reliance Industries for March 2022 can be calculated by dividing its current stock price by EPS.

So, 

Current Stock Price:- 2,584.85 INR

EPS:- 58.49

P/E = Current Stock Price / EPS

P/E = 2,584.85 / 58.49

P/E = 44.19

The final P/E ratio of Reliance Industries for the month of March 2022 is 44.19, which is considered to be positive and applicable for investing. If the PE ratio were anywhere below 10, then it would have more chance of going lower by the end of the year. 

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Wrapping Up

So this is how you can find out about the stock value of a company; the P/E ratio is a straightforward and simple method to evaluate the value of a stock. But still, it does not 100% confirm whether a stock value is good or not. It is just a method for investors to see whether it’s a good stock or not. As we said, there are lots of parameters on which stock value is determined. So you have to keep all of them in check before you invest your money in them.