What New Investors Need to Know About Share Price

• ITC Limited: Rs 480.35
• OLA Electric Mobility: Rs 81.07
• Reliance Industries: Rs 2,682.65

You might see these prices every time you search for a stock. But what do they mean? Well, these are called Share Prices. And these are the prices you have to pay if you want to invest in any stock.

If done right, investing in the stock market can be a good way to create wealth. In FY24 alone, the Nifty midcap indices showed an increase of a whopping 60%. 

However, the stock market has its own specific terms and concepts that one must familiarise themselves with. And it can be a bit overwhelming to start. 

One key idea you should understand before starting is "share price." That is why we have created this article for you! Here, you'll find an explanation of what share price means, what factors affect it, and how it influences your investment decisions, with examples. Here we go!

What is the Share Price?

Well, it is the price at which you can buy or sell one share of a company's stock. It is also known as the stock price, which shows the market value of a company. Buying a share means buying a very small part of the company. And, the value of this stake fluctuates based on the share price. 

What you need to remember is that this value is not fixed. It can rise and fall based on a range of factors that we will discuss further in the article. 

What is the Share Price of a Company?

This is the current value at which a company's shares are being traded in the market. For example, if the stock price of Tata Consultancy Services (TCS) is ₹4,585.90, this means that investors are willing to pay ₹4,585.90 for one share of TCS.

It is primarily determined by market supply and demand. Here is how it works! If more investors are interested in buying the stock than in selling it, demand exceeds supply. In this situation, the share price increases. However, if more people are willing to sell the shares and then buy them, supply exceeds demand, and prices drop. However, it is affected by other factors as well.

Factors Affecting Share Price

There are several factors that affect share prices. These often lead to fluctuations in the market. These factors can be broadly categorised into internal and external factors.

Internal Factors:

• Earnings Reports: Often, the share prices of companies with strong earnings reports see a rise. For example, if a company's earnings exceed 10%, its share price may increase by 5-15%.
   
• Management Decisions: These include mergers or new product launches. For example, news of Bharti Airtel's partnership with Fortinet led to a 1.77% increase in stock price.

• Dividends: Investors are often attracted to companies that pay dividends consistently. Suppose a company's dividend increases by 10%. This can lead to a price increase of maybe 3 to 5%.

External Factors:

• Market Sentiment: A favourable industry report or positive news can drive the prices up. Take Justdial, for example. The company reported good Q2 results, with profits rising up to 114%. As a result, its share prices rose by 10%.  

• Supply and Demand: If a company announces a stock split (e.g., a 2-for-1 split), the share price may drop. This happened with Mazagon Dock. After the company announced the stock split, its stock fell by 12%. 

• Macroeconomic Factors: Economic indicators like unemployment rates can also affect investor’s confidence. Stock prices may see a 2 to 3% increase when the GDP rises by 1%.
   
• Market Trends: When the market is in a bull run, share prices can rise significantly; for instance, during the 2024 bull market, the Nifty 50 grew with a CAGR of 23.6%.

Collectively, these factors shape investors’ perceptions and decisions, which ultimately affect share prices in the stock market.

Share prices fluctuate every second in the market. These changes happen all throughout the trading hours. This happens because the stock market immediately operates on the principles of demand and supply. 

Whenever a company is in the news, may it be for positive or negative reasons, its share prices see the effects. You can take the recent Twitter war involving Ola's owner and Kunal Kamra. This generated a significant buzz online and influenced investor segments. It may be one of the reasons why Ola's shares have dropped in the last 3 months.

However, if Ola were to supposedly announce better-than-expected profits. The demand for its shares may push prices upwards.

Intrinsic Value vs Market Value

When speaking of share prices, two concepts come to mind: 

• Intrinsic value 
• Market value 

These are very different things. 

Intrinsic Value

This is the real value or the true worth of companies on the basis of their financial health and fundamentals, such as: 

• Earnings
• Dividends
• Growth potential

The better the company's fundamentals, the higher its intrinsic value. However, this is not the same as the company's market value.

Market Value:

This is the current price at which the stock is being traded in the market. When we talk about the share price, this is the value we look at. A company's intrinsic value or real work may be ₹100 in part. The same stock may be trading in the market for ₹120 or ₹90.

Comparing the company's intrinsic value with its market value is how we can determine if the company is overvalued or undervalued. If intrinsic value is higher than market value, the stock may be undervalued; if it's lower, the stock might be overvalued. 

How to Calculate Share Price

Now that you know how share prices are used, let's move on to how you can calculate them. It may seem difficult, but you can calculate them easily. Here's how:

Price-to-Earnings (P/E) Ratio: This metric compares the current share price of the company to its Earnings Per Share (EPS). It is an indication of the amount of money investors are willing to pay for each unit of profit. 

Imagine the stock price of a company is ₹700, and its EPS is ₹50. This means the P/E ratio would be 14. A higher P/E might indicate that the stock is overvalued or that investors expect future growth.

Price-to-Book (P/B) Ratio: It compares the market and the book value of a company’s shares. Let's suppose that you can buy a share of company ‘X’ for ₹500, and its book value is ₹150 per share. In this case, the P/B ratio would be 3.33. 

Usually, a P/B ratio:

Lower than 1 may be an indication that the stock is undervalued. 
Higher than 1 may be an indication that the stock is overvalued. 

Price-to-Sales (P/S) Ratio: It is basically a comparison of a company's share price with its revenue per share. For example, if:

Share price = ₹100
Sales per share: ₹20 

Then, P/S ratio = 2

This ratio comes in handy when you want to evaluate a company that has low or negative earnings. 

Dividend Yield: Here, we consider and compare the amount a company pays as dividends with its share price. High yield may be a crucial factor if your goal is to earn steady returns.

You can use these ratios to find out the correct valuation of any company. As an investor, you should do it before making any investment decisions. You can either calculate it manually or do it the Ticker way! 

TickerPlus has advanced valuation calculators that can help you find out if a company is over, under or rightly valued within seconds. So, subscribe to TickerPlus and find the fair value of any listed company!

How are Stock Prices Set?

Share prices are set via an auction process of the stock exchanges like the NSE or the BSE. When a stock is sold, the:

• Buyers place bids
• Sellers place offers

The auction matches the highest price a buyer is willing to pay (the bid) with the lowest price a seller is willing to accept (the ask). When these prices meet, a transaction is executed.

Liquidity plays a very important role in this process. Now, liquidity refers to how easily you can buy or sell a share without affecting its price. High liquidity means more buyers and sellers are actively trading in a stock. Whereas low liquidity means even small trades can lead to sharp price movements.

Common Myths About Share Prices

There are some misconceptions about share prices. And if you believe in them, you might make some bad investment decisions. So, let’s do some myth-busting.

Myth 1: Lower-Priced Stocks Are Cheaper

It is commonly believed that a stock priced at ₹10 is cheaper than one priced at ₹100. But it's not true. The company with a share price of ₹10 could have:

• More outstanding shares
• Higher market cap

You cannot judge the value of a company with just the price of a stock. The real measure of a company's worth is its market cap. You can calculate it by multiplying the share price by the number of shares available.

Myth 2: Share Prices Reflect a Company's Worth

You might think that the share price is a direct reflection of a company’s worth. But again, you would be wrong. It's the market cap of a company that you want to focus on, not just the share price alone. 

Suppose:

• Company A has 50,000 shares of ₹10 each. Then, its market cap is ₹5,00,000.
• Company B has 1,00,000 shares of ₹5 each. Then its market cap is also ₹5,00,000.

Both companies are equally valued despite their different share prices.

Myth 3: High Share Prices Mean a Better Company

Jitna mehenga, utha behtar. We hope you don’t believe in such sayings, because it is quite untrue. A high share price does not indicate the success of the company. There are many factors that can lead to a high share price, as we discussed in the Factors Affecting Share Price section. 

That’s why judging the success of a company without considering the number of shares can be misleading. Always remember: price does not equate to value.

Conclusion

So, now you know how important it is to understand share price as a concept. It is not just the price at which you buy/sell a share. It is the reflection of the market value of the company. And it is highly volatile. 

Share price is influenced by a number of factors, both internal and external. By understanding what the share price is and how it is determined, you can make better decisions and maybe even earn higher returns.

Understanding share prices as a concept is one thing, and tracking them is another. Whichever company you decide to invest in, you need to keep a close eye on its share price. 

But how can you do that? Well, it's easy. You can start tracking the share prices of any listed company on Ticker. You can also get a share price summary of the 52-week high low and price chart with returns over different time periods. This will help you make better-informed decisions.