How is a share price of the company calculated?

The stock market is a glorious demonstration of the laws of supply and demand. In classical economics, prices rise where there are more buyers than sellers, and vice versa. On a basic level a share price change indicates an imbalance between buyers and sellers. The company's management, services, products, financial situation, prices, and popularity all play a role in the outcome of its stock. Determining the prices of stock is not an easy thing and is calculated via a number of different calculations.

Professional  investors, the financial analysts, employ clever mathematical techniques to arrive at an estimate of the future price of company shares. Since the value is based on the analysts' assumptions, the outcome can be different from that expected. When an assumption turns out to be wrong, the analyst will have to re-evaluate the price he has placed on the company, as the effect of the change will ripple through the model.

Stocks have two types of valuations. One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for (in other words, by supply and demand). Both of these values change over time as investors change the way they analyze stocks and as they become more or less confident in the future of stocks.

The fundamental valuation is the valuation that people use to justify stock prices. The most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio. This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices.

'Price-Earnings Ratio - P/E Ratio'
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

Example :
PE ratio is the main thing for calculating the value of a stock among a single industry.. if the PE ratio is 50. that means for 50 rupees investment u r getting 1 rupee profit as a share holder.. and if another company stock PE ratio is 60 with in the same industry (say INFOSYS PE is 50 and WIPRO PE is 60) that means INFOSYS is giving u 1 rupee profit for 50 investment and WIPRO is giving 1 rupee profit for 60 investment.. so u will choose INFOSYS.

There are a couple of other factors in determining the EPS, one of which is preferred dividends. This is the distribution of a portion of the company's earnings, and the figure shown is generally the dollar amount that each share receives once it is sold or traded.

The other way stocks are valued is based on supply and demand. The more people that want to buy the stock, the higher its price will be. And conversely, the more people that want to sell the stock, the lower the price will be. This form of valuation is very hard to understand or predict, and it often drives the short-term stock market trends.

When deciding whether to purchase or sell stocks, investors consider the general business climate and outlook, the financial condition and prospects of the individual companies in which they are considering investing, and whether stock prices relative to earnings already are above or below traditional norms. Interest rate trends also influence stock prices significantly. Rising interest rates tend to depress stock prices -- partly because they can foreshadow a general slowdown in economic activity and corporate profits, and partly because they lure investors out of the stock market and into new issues of interest-bearing investments. Falling rates, conversely, often lead to higher stock prices, both because they suggest easier borrowing and faster growth, and because they make new interest-paying investments less attractive to investors. For instance, gas prices have a large impact on the share prices of electricity generators.

Calculating stock prices is done at the close and open of the market each day. However, it is important to note that this price is not always the same as the company's closing price the night before; after-hours trading as well as the time company news is released can affect the opening price of the stock the next day. After-market trading occurs when investors trade stocks and bonds on the market after the normal business hours of 9:00 am to 3:30 pm . Oftentimes, the activity of buying and selling during after hours trading can either lower or raise the stock's opening price the next day. These price fluctuations are especially true for stocks that have limited trading activities. In addition, the prices of certain stocks during after-market trading are generally not reflective of the stocks' regular prices for a number of reasons. This results in having to calculate and update the stocks' prices.

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